This paper studies an economy where the labour market does not necessarily clear because real wages are sticky. Wages are fully indexed to prices, and are optimally adjusted over time in response to steady state deviations of output and of inflation. Inflation deviations will arise if wage setters make contracts that take into account long term forces, fulfilling a “social contract”. When fiscal policy drives a wedge between long run and current inflation, it can have supply-side effects.
|Number of pages||35|
|Journal||Research discussion papers|
|Issue number||RDP 8611|
|Publication status||Published - Aug 1986|