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Synchronization in wage setting and the effects of monetary policy

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  • Olivei, Giovanni
  • Tenreyro, Silvana

Abstract

Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto, for example, presents a clear case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. In contrast, wage agreements in Germany are well-spread within the calendar year, implying a relatively uniform degree of rigidity. We exploit the variation in timing of wage agreements within the year in Japan vis-à-vis the three largest European countries (Germany, the UK, and France) to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage-rigidity plays a key role in the transmission of monetary policy.

Suggested Citation

  • Olivei, Giovanni & Tenreyro, Silvana, 2007. "Synchronization in wage setting and the effects of monetary policy," LSE Research Online Documents on Economics 4990, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:4990
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    File URL: http://eprints.lse.ac.uk/4990/
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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