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

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  • David, DE LA CROIX

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Gregory, DE WALQUE
  • Rafael, WOUTERS

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 affect nominal interest rates and inflation outcomes

Suggested Citation

  • David, DE LA CROIX & Gregory, DE WALQUE & Rafael, WOUTERS, 2006. "Dynamics and monetary policy in a fair wage model of the business cycle," Discussion Papers (ECON - Département des Sciences Economiques) 2006061, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2006061
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    References listed on IDEAS

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    Cited by:

    1. Gerhard Rünstler, "undated". "Shirking, Endogenous Lay-off Rates and the A-cyclicality of the Real Wage," WIFO Working Papers 350, WIFO.
    2. Danthine, Jean-Pierre & Kurmann, André, 2010. "The business cycle implications of reciprocity in labor relations," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 837-850, October.
    3. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    4. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 42-59.
    5. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.
    6. Dennis Wesselbaum, 2013. "Reciprocity and matching frictions," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 60(3), pages 247-268, September.
    7. Yakita, Akira, 2014. "Involuntary unemployment and sustainability of bond-financed fiscal deficit," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 79-93.
    8. Sean Langcake, 2010. "Inflation Persistence and Labour Market Frictions: An Estimated Efficiency Wage Model of the Australian Economy," School of Economics Working Papers 2010-15, University of Adelaide, School of Economics.

    More about this item

    Keywords

    Efficiency wage; effort; inflation persistence; monetary policy;

    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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