Real wage rigidities and the new Keynesian model
By: Olivier Blanchard, Jordi Gali.
Contributors: Galí, Jordi, 1961-; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11806; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11806.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Keynesian economics.; Wages -- Mathematical models.; Inflation (Finance) -- Mathematical models
Description: "Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output.  However, the standard new Keynesian framework implies no such trade-off.  In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap.  In this paper, we argue that this property of the new Keynesian framework, which we call the "divine coincidence", is due to a special feature of the model: the absence of non trivial real imperfections.  We focus on one such real imperfection, namely, real wage rigidities.  When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap.  We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties.  In particular, it provides a natural interpretation for the dynamic inflation--unemployment relation found in the data"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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