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Synchronization in wage setting and the effects of monetary policy

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  • Giovanni Olivei
  • Silvana Tenreyro

Abstract

Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto, for example, presents a clear case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. In contrast, wage agreements in Germany are well-spread within the calendar year, implying a relatively uniform degree of rigidity. We exploit the variation in timing of wage agreements within the year in Japan vis-à-vis the three largest European countries (Germany, the UK, and France) to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage-rigidity plays a key role in the transmission of monetary policy.

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File URL: http://eprints.lse.ac.uk/4990/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4990.

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Length: 53 pages
Date of creation: 21 Dec 2007
Date of revision:
Handle: RePEc:ehl:lserod:4990

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  1. Nakashima, Kiyotaka, 2006. "The Bank of Japan's operating procedures and the identification of monetary policy shocks: A reexamination using the Bernanke-Mihov approach," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 406-433, September.
  2. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  4. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  5. Gary Solon & Robert Barsky & Jonathan A. Parker, 1992. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias," NBER Working Papers 4202, National Bureau of Economic Research, Inc.
  6. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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