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Causal relationship between prices and wages: VECM analysis for Germany

  • Hoxha Adriatik

    ()

    (Department of Economics, Faculty of Economy, University of Prishtina)

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    The literature on causality as well as the empirical evidence clearly shows that there are two opposing groups of economists, who support different hypotheses with respect to the flow of causality in the price-wage causal relationship. The first group argues that causality runs from wages to prices, whereas the second argues that effect flows from prices to wages. Nonetheless, there is at least some consensus that researcher’s conclusions may be contingent on the type of data employed, applied econometric model, or even that the relationship may vary through economic cycles. This paper empirically examines the price-wage causal relationship in Germany, by using OLS and VECM analysis, and it also provides robust evidence in support of a long-run unilateral causal relationship between prices and wages, running from wages to prices. In contrast, the evidence suggests that there is no statistically significant short-run relationship between prices and wages. Prior to designing and estimating the econometric model we have performed stationarity tests for the employed price, wage and productivity variables. Additionally, we have also specified the model taking into account the lag order as well as the rank of co-integration for the co-integrated variables. Furthermore, we have also applied respective restrictions on the parameters of the estimated VECM. The evidence resulting from model robustness checks indicates that results are statistically robust. Although far from closing the issue of causality between prices and wages, this paper at least provides solid evidence for the case of Germany.

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    File URL: http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/719/656
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    Article provided by Danubius University of Galati in its journal Euroeconomica.

    Volume (Year): (2010)
    Issue (Month): 26 (November)
    Pages: 90-106

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    Handle: RePEc:dug:journl:y:2010:i:26:p:90-106
    Contact details of provider: Web page: http://www.euroeconomica-danubius.ro/

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    1. Sara lemos, 2004. "The Effects of the Minimum Wage on Wages, Employment and Prices," Discussion Papers in Economics 04/10, Department of Economics, University of Leicester.
    2. Sara Lemos, 2004. "The Effects of the Minimum Wage on Prices in Brazil," Labor and Demography 0403011, EconWPA.
    3. Sara Lemos, 2006. "Anticipated effects of the minimum wage on prices," Applied Economics, Taylor & Francis Journals, vol. 38(3), pages 325-337.
    4. Sara lemos, 2004. "The Effect of the Minimum Wage on Prices," Discussion Papers in Economics 04/7, Department of Economics, University of Leicester.
    5. Sara Lemos, 2004. "The Effect of the Minimum Wage on Prices across Income Levels in Brazil," Discussion Papers in Economics 04/22, Department of Economics, University of Leicester.
    6. Sara Lemos, 2004. "Empirical Equations to Estimate the Effect of the Minimum Wage on Prices," Discussion Papers in Economics 04/24, Department of Economics, University of Leicester.
    7. Manuela Goretti, 2008. "Wage-Price Setting in New EU Member States," IMF Working Papers 08/243, International Monetary Fund.
    8. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    9. Andersson, Jonas, 2004. "Testing for Granger causality in the presence of measurement errors," Discussion Papers 2004/11, Department of Business and Management Science, Norwegian School of Economics.
    10. Moschos, D, 1983. "Aggregate Price Responses to Wage and Productivity Changes: Evidence from the U.S," Empirical Economics, Springer, vol. 8(3-4), pages 169-75.
    11. Carlos José Garcia & Jorge Enrique Restrepo, 2001. "Price and wage inflation in Chile," BIS Papers chapters, in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 109-130 Bank for International Settlements.
    12. Saikkonen, Pentti & L tkepohl, Helmut, 1999. "Local Power Of Likelihood Ratio Tests For The Cointegrating Rank Of A Var Process," Econometric Theory, Cambridge University Press, vol. 15(01), pages 50-78, February.
    13. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
    14. Jack Strauss & Mark E. Wohar, 2004. "The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 920-941, April.
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