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Karl Smith: Sticky Wages Are a Side Issue

Karl Smith:

Sticky Wages, Sticky Prices, Sticky Debt «  Modeled Behavior: Tyler Cowen calls sticky wages a weak and embarrassing paradigm:

Often when this topic comes up I feel I am playing a game of whack-a-mole.  Most of all, I am struck by how little attention people pay to their own sticky nominal wage hypotheses…. [Y]ou might expect people to blog the microfoundations of nominal wage stickiness very, very often…. Dozens, no hundreds of blog posts on the all-important microfoundations of the #1 social problem of our time…. [T]he sticky nominal wage theory is an embarrassment….

[T]he [real] story [is] sticky-prices… firms with some measure of market power… [that] want to sell more at the market price than the market will demand…. [A]lmost no business seems indifferent to more customers. A perfectly competitive firm would not really care at the margin if it had more customers…. The question is why would prices stick… menu costs… adjusting prices often imposes real costs for customers… limited attention… price increases trigger search.

Another [reason] is that there are some prices which are especially sticky for special reasons and this sticks the whole system – that’s part of my interest in real estate.

Another is that debt is nominal and solvency constraints cause stickiness. Lower your prices too much and you can’t pay your debt…

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