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Monetary Policy and Real Wage Cyclicality

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  • Chandarath Amarasekara
  • George Bratsiotis

Abstract

Several recent studies highlight the potential bias that may arise in measuring real wage cyclicality. This paper points to the important role of monetary policy in determining the latter. Using a simple model that diverts its focus from relative nominal price and wage rigidities, we show that other things kept equal, the degree and direction of real wage cyclicality is determined by the interaction of (i) the returns to scale in production, (ii) the nature of aggregate shocks, and (iii) monetary policy. Given that production technology is fairly constant in the short run, we suggest that variations in the real wage-output covariance depend largely on the latter two. Empirical evidence from eight major OECD countries appears to be consistent with this claim.

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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 122.

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Length: 42 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:man:cgbcrp:122

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