Duval, Romain and Vogel, Lukas (2007): How do nominal and real rigidities interact? A tale of the second best.
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This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
|Item Type:||MPRA Paper|
|Original Title:||How do nominal and real rigidities interact? A tale of the second best|
|Keywords:||DSGE model, price stickiness, real wage rigidity, oil price shocks|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
D - Microeconomics > D6 - Welfare Economics > D60 - General
|Depositing User:||Lukas Vogel|
|Date Deposited:||11. Dec 2010 01:23|
|Last Modified:||16. Feb 2013 01:58|
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How do nominal and real rigidities interact? A tale of the second best. (deposited 20. Feb 2008 16:49)
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