ABSTRACT
While the evidence of nominal inertia, of the failure of money wages and prices to adjust rapidly to market-clearing levels, is everywhere about us, a convincing and generally accepted theoretical explanation of this phenomenon has yet to be developed (1). This paper offers a possible explanation, related to recent work by Phelps (1978) and Taylor (1979, 1980) on staggered (or non-synchronised) wage contracts. It has been claimed (e.g. Taylor, 1980, p. 2) that in a model with rational expectations and in which wage contracts are the only source of rigidity, the practice of non-synchronised wage setting will of itself be capable of endogenously generating inertia in money wages and, associated with it, persistent real effects following from nominal shocks. However, Taylor’s model embodies a quasi-Phillips curve mechanism determining wages, which is assumed, rather than derived from any optimising behaviour. It could be argued, therefore, that, through the Phillips curve assumption, nominal inertia is imposed on, rather than explained by, Taylor ’s model.
