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Real wages and monetary policy: a DSGE approach

Author

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  • Bryan Perry
  • Kerk Phillips
  • David E. Spencer

Abstract

Purpose - – Studies of the cyclical behavior of real wages have identified monetary shocks and examined the response of real wages and output or employment. A finding that real wages are procyclical in response to a positive monetary policy shock is taken as evidence that prices are stickier than wages. The purpose of this paper is to show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Design/methodology/approach - – The authors simulate two prominent dynamic stochastic general equilibrium models under a variety of parameter values and examine the cyclicality of the real wage. Findings - – The authors offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, the authors cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock. Originality/value - – The authors show in this study that examining the response of real wages is not enough to sort out the relative stickiness of prices and wages.

Suggested Citation

  • Bryan Perry & Kerk Phillips & David E. Spencer, 2015. "Real wages and monetary policy: a DSGE approach," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(5), pages 734-752, October.
    • Handle: RePEc:eme:jespps:v:42:y:2015:i:5:p:734-752
    DOI: 10.1108/JES-01-2014-0008
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    More about this item

    Keywords

    Monetary policy; DSGE models; Real wages;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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