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Wage Setting Patterns and Monetary Policy: International Evidence

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Author Info
Giovanni Olivei
Silvana Tenreyro

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Abstract

Systematic differences in the timing of wage setting decisions among industrialized countriesprovide an ideal framework to study the importance of wage rigidity in the transmission ofmonetary policy. The Japanese Shunto presents the most well-known case of bunching inwage setting decisions: From February to May, most firms set wages that remain in placeuntil the following year; wage rigidity, thus, is relatively higher immediately after the Shunto.Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of thecalendar year. In contrast, wage agreements in Germany are well-spread within the year,implying a relatively uniform degree of rigidity. We exploit variation in the timing of wagesettingdecisions within the year in Japan, the United States, Germany, the United Kingdom,and France to investigate the effects of monetary policy under different degrees of effectivewage rigidity. Our findings lend support to the long-held, though scarcely tested, view thatwage-rigidity plays a key role in the transmission of monetary policy.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0872.

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Date of creation: Jun 2008
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Handle: RePEc:cep:cepdps:dp0872

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Related research
Keywords: monetary policy; wage rigidity; seasonality;

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Find related papers by JEL classification:
E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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