We document the presence of asymmetric business cycles in both regular and contract labour markets in India, investigate the role of nominal wage rigidities in accounting for these asymmetries, and study optimal inflation policy in such a milieu. Using data from Annual Survey of Industries, we...

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.