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Nominal Wage Inertia in General Equilibrium Models

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  • Nuno Alves

Abstract

This paper argues that nominal wage inertia is a structural feature in low-inflation economies. Using a quarterly data set for six G7 countries we show that, unlike price inflation, nominal wage inflation responds sluggishly to both monetary and technology shocks. Accounting for this inertial behavior of nominal wages is a necessary condition for a model to capture the business cycle properties of nominal variables. We present several variants of the Calvo wage model that are able to mimic those properties in a general equilibrium framework. In contrast, models that focus on real wage rigidities or sticky prices fail to match the data.

Suggested Citation

  • Nuno Alves, 2004. "Nominal Wage Inertia in General Equilibrium Models," Working Papers w200415, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200415
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200415.pdf
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
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    Cited by:

    1. Danthine, Jean-Pierre & Kurmann, André, 2010. "The business cycle implications of reciprocity in labor relations," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 837-850, October.
    2. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.

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