The name is absent

balances. Note that the index h is dropped in equations (13) and (15), which
reflects our assumption of complete contingent claims markets for consump-
tion and implies that consumption is identical across all households in each
period (C_ht = Ct)⁴.

The reset wage is for household h in sector i is chosen to maximize lifetime
utility given labour demand (7) and the additional constraint that nominal
wage will be fixed for T_i periods in which the aggregate output and price level
are given{Y_t, P_t}. From the unions point of view, we can collect together all of
the terms in (7) which the union treats as exogenous by defining the constant
K_t where:

£

Kt = n₂Pt^εYt⁴

Since the reset wage at time t will only hold for T_i periods, we have the
following first-order condition:

E,. W' β∙ [½. (1 - ff,₊.) (K,_+s)]

S-O_s=()______________________________

E V^^τ≈ ¹ os Γw_c(C_t+s) K
'⁴Δ_s0 ^p [ p_t+s ^Kt+s\

Where E_t represents the conditional expectation taken only over states of
nature in which the household is unable to reset its wage contract. Equation
(16) shows that the optimal wage is a constant "mark-up" (given byɪ) over
the ratio of marginal utilities of leisure and marginal utility from consumption
within the contract duration s = t...t + T._i — 1 When T_i = 2, this equation
reduces to the fist order condition in Ascari (2000).

2.3 Government

There is a government conducts monetary policy via lump-sum transfer, that
^is,

Tt = Mt — Mt-ι

The money supply M_t grows at a rate μ_t so that M_t = μ_tM_t~₁. To fo-
cus on the role of the GTE in generating the output persistence, following
Huang and Liu (2001), we assume that there are no serial correlation in the
money growth process and therefore ln(μ_t) follows a white noise process, i.e.,

⁴See Ascari (2000).

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