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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. 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.
  2. Julian Messina & Chiara Strozzi & Jarkko Turunen, 2009. "Real Wages over the Business Cycle: OECD Evidence from the Time and Frequency Domains," Working Papers 2009-02, FEDEA.
  3. 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.
  4. Christina Gerberding & Franz Seitz & Andreas Worms, 2005. "How the Bundesbank really conducted monetary policy," Computing in Economics and Finance 2005 60, Society for Computational Economics.
  5. 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.
  6. 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.
  7. A Brandolini, 1993. "In Search of a Stylised Fact: Do Real Wages Exhibit a Consistent Pattern of Cyclical Variability?," CEP Discussion Papers dp0112, Centre for Economic Performance, LSE.
  8. Bratsiotis, George J., 2007. "Monetary policy responses and strategic price setting," Economics Letters, Elsevier, vol. 95(3), pages 327-333, June.
  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.
  10. Dixon, Huw David & Kara, Engin, 2008. "Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity?," Cardiff Economics Working Papers E2008/22, Cardiff University, Cardiff Business School, Economics Section.
  11. 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.
  12. Spencer, David E, 1998. "The Relative Stickiness of Wages and Prices," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 120-37, January.
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