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

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Author Info
David de la Croix () (Department of economics, Université catholique de Louvain, CORE)
Gregory de Walque () (National Bank of Belgium, Research department, Department of Economics, University of Namur)
Rafael Wouters () (National Bank of Belgium, Research department)

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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 affects nominal interest rates and inflation outcomes

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Paper provided by National Bank of Belgium in its series Research series with number 200610-10.

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Length: 49 pages
Date of creation: Oct 2006
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Handle: RePEc:nbb:reswpp:200610-10

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

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
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    Other versions:
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  23. repec:cup:cbooks:9780521001151 is not listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nikolaus Siegfried & Emilia Simeonova & Cristina Vespro, 2007. "Choice of currency in bond issuance and the international role of currencies," Working Paper Series 814, European Central Bank. [Downloadable!]
  2. Joachim Keller, 2008. "Agency problems in structured finance – a case study of European CLOs," Documents series 200808-22, National Bank of Belgium. [Downloadable!]
  3. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
  4. Jean-Pierre DANTHINE & André KURMANN, 2007. "The Business Cycle Implications of Reciprocity in Labor Relations," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 07.12, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
  5. Philippe Moës, 2008. "Multivariate structural time series models with dual cycles : implications for measurement of output gap and potential growth," Research series 200808-20, National Bank of Belgium. [Downloadable!]
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