New essay: It was a mistake to switch to sticky price models from sticky wage models
Intuitively, wage stickiness seems more important than price stickiness
The first microfounded ‘new Keynesian’ models did use wage stickiness, not price stickiness; but in the mid-1980s there was a transition to sticky price models, which dominate today
But that transition was based on a set of arguments which today are regarded as wrong!
The policy implication: Taking wage stickiness seriously implies we should ensure stable nominal wage growth, not stable price inflation