Nominal rigidity

In economics, nominal rigidity, also referred to as price stickiness or wage stickiness, describes a situation in which a nominal price is slow to adjust or resistant to change. Complete nominal rigidity occurs when a price remains fixed in nominal terms for a relevant period of time. For example, the price of a good may be contractually set at $10 per unit for an entire year, regardless of changes in supply and demand conditions. Partial nominal rigidity occurs when prices can adjust, but less than they would under conditions of perfect flexibility. For instance, in a regulated market, there may be legal or institutional limits on how much a price can change within a given year.

Nominal rigidities are considered a central feature of many Keynesian and New Keynesian models, as they help explain why markets may not always clear and why shifts in aggregate demand can have real effects on output and employment in the short run. The concepts of sticky prices and sticky wages are particularly important for understanding the effectiveness of monetary policy.

If one looks at the whole economy, some prices might be very flexible and others rigid. This will lead to the aggregate price level (which we can think of as an average of the individual prices) becoming "sluggish" or "sticky" in the sense that it does not respond to macroeconomic shocks as much as it would if all prices were flexible. The same idea can apply to nominal wages. The presence of nominal rigidity is an important part of macroeconomic theory since it can explain why markets might not reach equilibrium in the short run or even possibly the long run. In his The General Theory of Employment, Interest and Money, John Maynard Keynes argued that nominal wages display downward rigidity, in the sense that workers are reluctant to accept cuts in nominal wages. This can lead to involuntary unemployment as it takes time for wages to adjust to equilibrium, a situation he thought applied to the Great Depression.