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Dynamics and monetary policy in a fair wage model of the business cycle

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  • DE LA CROIX, David
  • DE WALQUE, Gregory
  • WOUTERS, Rafael

Abstract

We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fairwage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm's productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affect nominal interest rates and inflation outcomes.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006106.

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Date of creation: 00 Nov 2006
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Handle: RePEc:cor:louvco:2006106

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Keywords: efficiency wage; effort; inflation persistence; monetary policy;

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  1. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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Citations

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Cited by:
  1. Jean-Pierre Danthine & André Kurmann, 2007. "The Business Cycle Implications of Reciprocity in Labor Relations," Cahiers de recherche 0743, CIRPEE.
  2. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary Persistence and the Labor Market: A New Perspective," CEPR Discussion Papers 7650, C.E.P.R. Discussion Papers.
  3. Dennis Wesselbaum, 2010. "Reciprocity and Matching Frictions," Kiel Working Papers 1616, Kiel Institute for the World Economy.
  4. Gerhard Rünstler, . "Shirking, Endogenous Lay-off Rates and the A-cyclicality of the Real Wage," WIFO Working Papers 350, WIFO.

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