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The Impact of Reference Norms on Inflation Persistence When Wages are Staggered

In this paper we present an extension of the Taylor model with staggered wages in which wage-setting is also influenced by reference norms (i.e. by benchmark wages). We show that reference norms can considerably increase the persistence of inflation and the extent of real wage rigidity but that these effects depend on the definition of reference norms (e.g. how backward-looking they are) and on whether the importance of norms differs between sectors. Using data on collectively bargained wages in Austria from 1980 to 2006 we show that wage-setting is strongly influenced by reference norms, that the wages of other sectors seem to matter more than own past wages and that there is a clear indication for the existence of wage leadership (i.e. asymmetries in reference norms).

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 153.

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Length: 63
Date of creation: 11 Mar 2009
Date of revision:
Handle: RePEc:onb:oenbwp:153
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  1. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
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  3. Karl Whelan & Jeremy Rudd, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," Computing in Economics and Finance 2003 181, Society for Computational Economics.
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  6. Holden, Steinar & Wulfsberg, Fredrik, 2007. "Are real wages rigid downwards?," Memorandum 07/2007, Oslo University, Department of Economics.
  7. Smith, Jennifer C, 1996. "Wage Interactions: Comparisons or Fall-Back Options?," Economic Journal, Royal Economic Society, vol. 106(435), pages 495-506, March.
  8. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  9. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  10. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips curves," Working Paper Series 0785, European Central Bank.
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  12. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  13. Franz Traxler & Bernd Brandl & Vera Glassner, 2008. "Pattern Bargaining: An Investigation into its Agency, Context and Evidence," British Journal of Industrial Relations, London School of Economics, vol. 46(1), pages 33-58, 03.
  14. Lindquist, Matthew J. & Vilhelmsson, Roger, 2004. "Is the Swedish Central Government a Wage Leader?," Working Paper Series 8/2004, Swedish Institute for Social Research.
  15. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Computing in Economics and Finance 2006 525, Society for Computational Economics.
  16. Huw Dixon & Engin Kara, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Discussion Papers 07-01, Department of Economics, University of Birmingham.
  17. Olivier Jeanne, 1997. "Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?," NBER Working Papers 6258, National Bureau of Economic Research, Inc.
  18. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  19. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  20. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  21. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March.
  22. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  23. Huang, Kevin X. D. & Liu, Zheng, 2002. "Staggered price-setting, staggered wage-setting, and business cycle persistence," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 405-433, March.
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