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Causal relationship between wages and prices in R. Macedonia: VECM analysis

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  • Josheski, Dushko
  • Bardarova, Snezana

Abstract

In this paper the issue of causality between wages and prices in R. Macedonia has been tested. OLS relationship between prices and wages is positive; productivity is not significant in determination of prices or wages too. Engle-Granger test proved that variables of interest CPI and average real wage are cointegrated, i.e. there exists long run relationship between those variables, when first differenced. While their levels are not cointegrated. ARDL regression proved that between CPI and average real wage there exists almost significant long run relationship (tstat=1.60), and coefficient is of size 0.3353 at one lag. Unit root test showed that CPI and average real wage are I (1) variables. Johansen’s test of cointegration showed that we cannot reject the null hypothesis of having rank 1 (rank=1) and therefore the number of cointegrating vectors is one. Optimal number of lags according for VARs and VECMs is 1. From the VECM model we can see which variable responds more if there is shock in the system, and it seems that average real wage responds more on the shock in the system.

Suggested Citation

  • Josheski, Dushko & Bardarova, Snezana, 2013. "Causal relationship between wages and prices in R. Macedonia: VECM analysis," EconStor Preprints 77910, ZBW - German National Library of Economics.
  • Handle: RePEc:zbw:esprep:77910
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    References listed on IDEAS

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    1. Shik Heo, 2003. "The Relationship Between Efficiency Wages And Price Indexation In A Nominal Wage Contracting Model," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(2), pages 117-128, December.
    2. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    4. Saten Kumar & Don J. Webber & Geoff Perry, 2012. "Real wages, inflation and labour productivity in Australia," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 2945-2954, August.
    5. Peter Flaschel & Göran Kauermann & Willi Semmler, 2007. "Testing Wage And Price Phillips Curves For The United States," Metroeconomica, Wiley Blackwell, vol. 58(4), pages 550-581, November.
    6. Jack Strauss & Mark E. Wohar, 2004. "The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 920-941, April.
    7. Moschos, D, 1983. "Aggregate Price Responses to Wage and Productivity Changes: Evidence from the U.S," Empirical Economics, Springer, vol. 8(3-4), pages 169-175.
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    More about this item

    Keywords

    Granger causality; wages; prices; VECM;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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