Thursday, June 07, 2012

downward nominal wage rigidity

DeLong links to Tim Duy:
And she dismisses the idea that a large output gap is inconsistent with current inflation:
…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.
To put in crude terms if it wasn't for downward nominal wage rigidity we'd have deflation. Right?

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