We develop in this article a new form of wage contracts similar in spirit tothose developed by Calvo (1983), and integrate these contracts into adynamic stochastic general equilibrium model. Rational wage setting byutility maximizing trade-unions is explicitly modelled. We derive theoptimal wage contracts, and compute the dynamic macroeconomic response tomonetary shocks. It is shown that, unlike in most traditional models, thisresponse can display strong persistence, a hump shaped response and positiveautocorrelations in output and employment variations. All these results areobtained in a model with explicit closed-form solutions.
