Abstract
In two recent papers Gertler (1979) and Hoel (1979) have analyzed the dynamic behavior of some simple macroeconomic models when it is assumed that there is imperfect flexibility of wages or prices and price expectations are formed rationally. Gertler analyzed a model in which there is imperfect flexibility of prices but wages are implicitly perfectly flexible. Hoel's model is one in which, though there is imperfect flexibility of wages, prices are perfectly flexible. Our purpose in this note is to consider the dynamic behavior of a simple macroeconomic model in which price expectations are formed rationally but there are elements of both wage and price rigidity. We also examine the behavior of a model in which, unlike in the Gertler and Hoel models, the degree of flexibility of wages is an endogenous variable. In Section II we outline the basic model. Section III investigates the stability characteristics of this model. In Section IV we analyze a model in which the degree of flexibility of wages is endogenous and in Section V we comment on the implications of our analysis.
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