Macroeconomic Dynamics with Downward Nominal Rigidity
Recently I wrote several posts about macro models with optimizing agents but with downward nominal rigidity. I’ve putten the thoughts together here (pdf warning) with greek letters and subscripts (but without an equation editor).
Here is an updated effort (still a pdf)
Interesting notes. My own calculations show that what is important here is whether the real wage (or real interest rate) is set appropriately. If the real wage is “too high,” the economy goes to hell. (Likewise, if the real interest rate is too low — below it’s “natural” rate.) Whether the economy is in a “liquidity trap” or not is peripheral to the point made in these notes.