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What Does Downward Nominal-Wage Rigidity Imply for Monetary Policy?

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A recent paper has suggested there might be a trade-off between inflation and unemployment at low inflation rates and this has led some economists to recommend that Canada increase its inflation rate. Underlying this view is the idea that, because firms are reluctant to cut workers' nominal wages, a moderate amount of inflation can be used to facilitate needed reductions in real wages. This paper discusses the link from downward nominal-wage rigidity to unemployment and considers some of the issues that need to be addressed to determine whether a change in Canada's monetary policy is warranted.

Also published as:

Canadian Public Policy (0317-0861)
December 1998. Vol. 24, Iss. 4, pp. 513-25