... consump-tion, the capital stock, the wedges, and so on. The equilibrium of the modeldepends on these expectations and, therefore, on the stochastic process driving the wedges. The third step ... stusing the three equations (3)–(5 )and thereby uncover the state. We use the associated values for the wedges in ourexperiments. BUSINESS CYCLE ACCOUNTING 797Note that the four wedges account for ... is the nominal wage for differentiated labor oftype j. Nominal wages are set by unions before the realization of the event inperiod t; thus, wages depend on, at most, st−1. The demand for...