The dynamic effects of shocks to wages and prices in the United States and the Euro Area

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Wage Dynamics NetworkThis paper contains research conducted within the Wage Dynamics Network (WDN). The WDN is a research network consisting of economists from the European Central Bank (ECB) and the national central banks (NCBs) of the EU countries. The WDN aims at studying in depth the features and sources of wage and labour cost dynamics and their implications for monetary policy. The specific objectives of the network are: i) identifying the sources and features of wage and labour cost dynamics that are most relevant for monetary policy and ii) clarifying the relationship between wages, labour costs and prices both at the firm and macro-economic level.The WDN is chaired by Frank Smets (ECB). Giuseppe Bertola (Università di Torino) and Julian Messina (Universitat de Girona) act as external consultants and Ana Lamo (ECB) as Secretary.The refereeing process of this paper has been co-ordinated by a team composed of Gabriel Fagan (ECB, chairperson), Philip Vermeulen (ECB), Giuseppe Bertola, Julian Messina, Jan Babecký (CNB), Hervé Le Bihan (Banque de France) and Thomas Mathä (Banque centrale du Luxembourg).The paper is released in order to make the results of WDN research generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the author's own and do not necessarily reflect those of the ESCB. ECB Working Paper Series No 1067July 2009 Abstract 4 Non-technical summary 5

Price and Wage Formation in Portugal

“…As regards the coecient of the unemployment rate we note that the estimate −0.097, is in line with the standard elasticity estimates obtained in the literature for other countries, which usually stand close to −0.10 (see, for instance, Blanchower and Oswald (1994)). The estimate for Portugal is signicantly lower than the ones obtained in Duarte and Marques (2009) for the US (−0.327, for 1993q1-2007q4) and the EA (−0.157, for 1989q1-2007q4), but close to the estimate obtained in Carneiro and Portugal (2008a), as shown in section 3.…”

“…The estimated coecients for the price equation suggest that the long-run coefcients on unit labour costs (w − h) and import prices z are basically similar. The estimate for the coecient on import prices (−0.501) is signicantly higher than the corresponding estimates obtained in Duarte and Marques (2009) for the US (0.128) and the EA (0.374).…”

“…The analysis draws on previous work for the Portuguese economy (see Marques (2008)), the US and the EA (see Duarte and Marques (2009)) 14 . The approach is conducted within a structural error-correction model which allows comparing the persistence of real wages, wage and price ination across shocks for dierent economies.…”

“…The model consists of a production function, a wage setting equation, an equation describing price formation, an equation for the unemployment rate and an equation for the import prices in domestic currency. The equations contain a minimum of dynamics in order to simplify the discussion about 14 The results for the US and the EA used here for comparison purposes are taken from Duarte and Marques (2009), but the results for the Portuguese economy dier signicantly from the ones presented in Marques (2008). The dierences stem from three main sources: 1) The sample period was updated to include data for 2007; ii) there was a major revision of the data on labour productivity which implied important changes on the coecients, as well as on some properties of the estimated model and iii) a dierent assumption underlying the identication of some of the shocks was introduced in order to ensure full comparability with the results for the US and the EA, reported in Duarte and Marques (2009).…”

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“…A similar approach has been followed by Duarte and Marques (2009), where an empirical SVECM involving nominal wages, prices, the unemployment rate, productivity and import prices is estimated for the euro area and the US. The main finding of the paper is that wage dynamics are mainly determined by unemployment shocks in both economies but a significant role is also played by technology shocks in the US and by import price shocks in the euro area.…”