N. Gottfries et A. Westermark, NOMINAL WAGE CONTRACTS AND THE PERSISTENT EFFECTS OF MONETARY-POLICY, European economic review, 42(2), 1998, pp. 207-223
We consider an efficiency wage model where wages affect turnover and f
irms choose optimal labor contracts under uncertainty about demand and
productivity. We show that there may be an equilibrium with nominal w
age contracts where monetary shocks affect output. Furthermore, moneta
ry shocks have persistent effects on output because the previous state
of the labor market affects the reemployment probability of quitting
workers. Persistence increases if workers have bargaining power. With
endogenous policy, a credibility problem arises naturally in the model
. Equilibrium inflation increases with persistence but decreases with
the natural rate of unemployment for given persistence. (C) 1998 Elsev
ier Science B.V. All rights reserved.