Download or read book The Inflation-output Trade-off with Downward Wage Rigidities written by Pierpaolo Benigno and published by . This book was released on 2010 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the presence of downward nominal wage rigidities, wage setters take into account the future consequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a long-run Phillips curve which relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outward and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility.