And she dismisses the idea that a large output gap is inconsistent with current inflation:To put in crude terms if it wasn't for downward nominal wage rigidity we'd have deflation. Right?
…substantial cross-country evidence suggests that, in low-inflation environments, inflation is notably less responsive to downward pressure from labor market slack than it is when inflation is elevated. In other words, the short-run Phillips curve may flatten out. One important reason for this non-linearity, in my view, is downward nominal wage rigidity–that is, the reluctance or inability of many firms to cut nominal wages.
Thursday, June 07, 2012
downward nominal wage rigidity
DeLong links to Tim Duy:
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