Disinflationary boom in a price-wage spiral model

This paper analyses the impact of the disinflation policy timing on the sign and the magnitude of the sacrifice ratio in a modified price and wage staggered model of Blanchard (1986). When wages are updated every four quarters and prices every two quarters, we show that a “cold-turkey” disinflation is associated to an output boom when the policy is implemented during the last period of life of the wage contract and a recession in the other quarters.