Bank of Israel paper advocates inflation sacrifice when wages are rigid

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When facing wage rigidity, monetary policy should accommodate larger fluctuations in inflation to keep unemployment more steady, according to a discussion paper published by the Bank of Israel on January 13.

The author, Alon Binyamini, considers how different labour market conditions impact the sacrifice ratio – the cost of the economic output that must be foregone to move the inflation rate.

Nominal wage rigidity, the author finds, lowers unemployment as wages fall and labour effort increases

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