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Monetary Policy and Real Wage Cyclicality

  • Chandarath Amarasekara
  • George Bratsiotis

Several recent studies highlight the potential bias that may arise in measuring real wage cyclicality. This paper points to the important role of monetary policy in determining the latter. Using a simple model that diverts its focus from relative nominal price and wage rigidities, we show that other things kept equal, the degree and direction of real wage cyclicality is determined by the interaction of (i) the returns to scale in production, (ii) the nature of aggregate shocks, and (iii) monetary policy. Given that production technology is fairly constant in the short run, we suggest that variations in the real wage-output covariance depend largely on the latter two. Empirical evidence from eight major OECD countries appears to be consistent with this claim.

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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 122.

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Length: 42 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:man:cgbcrp:122
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  1. Ben S. Bernanke & Kevin Carey, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 853-883.
  2. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
  3. Malley, James R. & Muscatelli, V. Anton & Woitek, Ulrich, 2005. "Real business cycles, sticky wages or sticky prices? The impact of technology shocks on US manufacturing," European Economic Review, Elsevier, vol. 49(3), pages 745-760, April.
  4. Messina, Julian & Strozzi, Chiara & Turunen, Jarkko, 2009. "Real wages over the business cycle: OECD evidence from the time and frequency domains," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1183-1200, June.
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  7. Edward Nelson, 2005. "Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  8. Ben S. Bernanke & Kevin Carey, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," NBER Working Papers 5439, National Bureau of Economic Research, Inc.
  9. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
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  11. Brandolini, Andrea, 1995. " In Search of a Stylised Fact: Do Real Wages Exhibit a Consistent Pattern of Cyclical Variability?," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 103-63, June.
  12. Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
  13. Artus, P. & Avouyi-Dovi, S. & Bleuze, E. & Lecointe, F., 1991. "Transmission of U.S. monetary policy to Europe and asymmetry in the European monetary system," European Economic Review, Elsevier, vol. 35(7), pages 1369-1384, October.
  14. CASTRO, Rui & COEN-PIRANI, Daniele, 2005. "Why Have Aggregate Skilled Hours Become so Cyclical since the Mid-1980’s?," Cahiers de recherche 24-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  15. Spencer, David E, 1998. "The Relative Stickiness of Wages and Prices," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 120-37, January.
  16. Bratsiotis, George J., 2007. "Monetary policy responses and strategic price setting," Economics Letters, Elsevier, vol. 95(3), pages 327-333, June.
  17. Gavosto, Andrea & Pellegrini, Guido, 1999. "Demand and supply shocks in Italy:: An application to industrial output," European Economic Review, Elsevier, vol. 43(9), pages 1679-1703, October.
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