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

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  • David, DE LA CROIX

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Gregory, DE WALQUE
  • Rafael, WOUTERS

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 fair wage 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, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006061.

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Date of creation: 01 Nov 2006
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Handle: RePEc:ctl:louvec:2006061

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

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Cited by:
  1. Gerhard Rünstler, . "Shirking, Endogenous Lay-off Rates and the A-cyclicality of the Real Wage," WIFO Working Papers 350, WIFO.
  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. Danthine, Jean-Pierre & Kurmann, Andre, 2007. "The Business Cycle Implications of Reciprocity in Labour Relations," CEPR Discussion Papers 6587, C.E.P.R. Discussion Papers.
  4. Dennis Wesselbaum, 2013. "Reciprocity and matching frictions," International Review of Economics, Springer, vol. 60(3), pages 247-268, September.

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