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The dynamic effects of shocks to wages and prices in the United States and the Euro Area

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  • Rita Duarte

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  • Carlos Marques

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Abstract

This article investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent technology shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the article. Copyright Springer-Verlag 2013

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  • Rita Duarte & Carlos Marques, 2013. "The dynamic effects of shocks to wages and prices in the United States and the Euro Area," Empirical Economics, Springer, vol. 44(2), pages 613-638, April.
  • Handle: RePEc:spr:empeco:v:44:y:2013:i:2:p:613-638
    DOI: 10.1007/s00181-012-0561-9
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    Keywords

    Structural error-correction model; Impulse response function; Persistence; C32; C51; E31; J30;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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