New essay: It was a mistake to switch to sticky price models from sticky wage models

https://basilhalperin.com/essays/sticky-prices-vs-sticky-wages.html

TLDR:

  1. Intuitively, wage stickiness seems more important than price stickiness

  2. 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

  3. But that transition was based on a set of arguments which today are regarded as wrong!

  4. The policy implication: Taking wage stickiness seriously implies we should ensure stable nominal wage growth, not stable price inflation