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Nominal Wage Inertia in General Equilibrium Models
E24 - Employment; Unemployment; Wages
E31 - Price Level; Inflation; Deflation
E32 - Business Fluctuations; Cycles
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.