Economics, Econometrics and Finance
4 years ago

Real wage rigidities challenge central banks' ability to stabilize economy.

Real Wage Rigidities and the New Keynesian Model
Olivier Blanchard, Jordi Galı́

Paper Summary

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Central banks face a trade-off between stabilizing inflation and output gap. The standard new Keynesian model doesn't show this, but when real wage rigidities are considered, the trade-off appears. The extended model is more realistic and explains the dynamic inflation-unemployment relation in data.