Chapter 6: Money in the Short Run: Nominal Price and Wage Rigidities (Monetary Theory and Policy, 3rd ed.)

In this chapter, the focus shifts away models with ‡exible wages and prices to models of sticky wages and prices. We begin this chapter with a simple example of a model with nominal wage rigidities that last for one period. We then review models that account for the observation that prices and wages may take several periods to adjust to changes in macroeconomic conditions. Time-dependent and state-dependent models of price adjustment are discussed. Time-dependent pricing models assume the probability a …rm changes its price is a function only of time, while state-dependent models make this probability a function of the current state of the economy. The focus in this chapter will be on the various models of nominal rigidities. In chapter 7, the new Keynesian Phillips curve develop in section 2.4 will be incorportated into a general equilibrium framework so that the implications of price and wage rigidities for monetary policy can be studied.