Journal of Political Economy Vol. 90 No. 5 1982
Imperfect Information and Wage Inertia in the Business Cycle
Abstract
Nominal wages have less variation about a trend than the money supply does, and the variation is more persistent. This inertia in the nominal wage is often cited as the principal source of stagflation. This paper explains the phenomenon by appealing to temporary wage inflexibility in an environment where agents cannot directly disentangle permanent versus transitory movements in key state variables. A wage equation results that is a distributed lag of previous values of the state variables, including money. Nominal wage variation becomes less sensitive to the money supply as agents' ability to detect the permanent evolution of the money supply declines.
- DOI
- 10.1086/261103
- Volume
- 90
- Issue
- 5
- Pages
- 967-987
- Language
- en
- Sources
- crossref openalex