In the presence of downwardly rigid nominal wages, low inflation may lead to higher equilibrium unemployment by hindering real wage adjustments. This article surveys and analyses the growing evidence on downwardly rigid nominal wages. We not only deal with assessments of the existence and extent of downward nominal wage rigidity, but also discuss its possible explanations and macroeconomic consequences. We conclude that downward nominal wage rigidity does exist, that its extent is substantial and that very likely the real consequences at low, close-to-zero inflation are non-negligible. The results of this strand of research should therefore be taken into account in the formulation of optimal inflation targets. Copyright Verein für Socialpolitik und Blackwell Publishers Ltd, 2005
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