Nominal Rigidities

Nominal rigidities refer to situations where prices and wages do not adjust quickly to changes in economic conditions, such as shifts in supply, demand, or inflation. This stickiness means that, even when the economy changes, prices and wages may remain fixed for a period, which can cause disturbances like unemployment or inflation. These rigidities happen due to factors like contracts, menu costs (the cost of changing prices), or workers’ preferences for stable incomes. Recognizing nominal rigidities helps explain why economic adjustments often take time and why monetary policy is important during economic fluctuations.