Real wage rigidities and the cost of disinations

This paper analyzes the cost of disination under real wage rigidities in a micro-founded New Keynesian model. Unlike Blanchard and Galí (2007) who carried out a similar analysis in a linearized framework, we take non-linearities into account. We show that the results change dramatically, both qualitatively and quantitatively, for the steady states and for the dynamic adjustment paths. In particular, a disination implies a prolonged slump without any need for real wage rigidities. JEL classi\u85cation: E31, E52