Finally, a sluggish adjustment of real wages adds a further complication to the policy trade-off in the face of an oil price shock: a higher price of oil increases real marginal costs and thus inflation as long as the necessary decline in real wages is not brought about.
With flexible real wages this poses no problem, with only gradually adjusting real wages the time profile of inflation and output also depends on the way monetary policy reacts. A non-accommodating monetary policy can achieve the necessary decline in real marginal costs in the face of sluggish real wages by further reducing output through a tighter response.