Rational Expectations, Rigid Wages, and the Real Effects of Monetary Policy
1985 (English)Report (Other academic)
This paper attempts to provide the simplest possible proof that rational price expectations do not neutralize monetary policy in the short run provided that nominal wages are sticky. The proof is presented within a very simple aggregate demand and supply framework with fully flexible proces. Each of the following three phenomena: adjustment costs, competing wage claims, and long-term labor contracts, is then shown to be sufficient (but not necessary) to generate the nominal wage rigidity on which the nonneutrality result is based. The effects of wage indexation are also discussed.
Place, publisher, year, edition, pages
Stockholm: IIES , 1985. , 21 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 333
IdentifiersURN: urn:nbn:se:su:diva-41503OAI: oai:DiVA.org:su-41503DiVA: diva2:330814