compared to the fully-flexible economy.
Key for our result is a law of motion for real wages, which amounts to a restriction … exogenous processes {gt,zt}. The restriction Rt ≥ 1 must also be satisfied. Finally,
the evolution of real wages is governed by …
wt
wt−1 =
piwt
pipt , (29)
which states that growth in real wages depends on by how much growth in nominal wages exceeds …