Real wages and monetary policy: a DSGE approach
Abstract
Purpose
Studies of the cyclical behavior of real wages have identified monetary shocks and examined the response of real wages and output or employment. A finding that real wages are procyclical in response to a positive monetary policy shock is taken as evidence that prices are stickier than wages. The purpose of this paper is to show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock.
Design/methodology/approach
The authors simulate two prominent dynamic stochastic general equilibrium models under a variety of parameter values and examine the cyclicality of the real wage.
Findings
The authors offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, the authors cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock.
Originality/value
The authors show in this study that examining the response of real wages is not enough to sort out the relative stickiness of prices and wages.
Keywords
Citation
Perry, B., Phillips, K. and Spencer, D.E. (2015), "Real wages and monetary policy: a DSGE approach", Journal of Economic Studies, Vol. 42 No. 5, pp. 734-752. https://doi.org/10.1108/JES-01-2014-0008
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited