Staggered wages and output dynamics under disinflation

We study the output costs of a reduction in monetary growth in a dynamic ge neral equilibrium model with staggered wages. The money wage is fixed for t wo periods, and is chosen according to intertemporal optimisation. Agents h ave labour market monopoly power. We show that the introduction of microfou ndations helps to resolve the puzzle raised by directly postulated models, namely that disinflation in staggered pricing models causes a boom. In our model disinflation, whether unanticipated or anticipated, unambiguously cau ses a slump. (C) 2002 Elsevier Science B.V. All rights reserved.