Disinflation with labor market frictions

Jong Kook Shin, Chetan Subramanian

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


This paper studies disinflationary shocks in a non-linear New Keynesian model with search and matching frictions and moral hazard in the labor markets. Our focus is on understanding the wage formation process as well as welfare costs of disinflations in the presence of such labor market frictions.

The presence of imperfect information in labor markets imposes a lower bound on worker surplus that varies endogenously. Consequently equilibrium can take two forms depending on whether the no shirking condition is binding or not. We also evaluate both regimes from a welfare perspective when the economy is subject to a perfectly credible disinflationary shock.
Original languageEnglish
Number of pages15
JournalJournal of Macroeconomics
Early online date13 Apr 2014
Publication statusPublished - Sept 2014


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