The Dynamic Effects of Shocks to Wages and Prices in the United States and the Euro Area

60 Pages Posted: 8 Jul 2009

Date Written: July 7, 2009

Abstract

This paper investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent productivity shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the paper.

Keywords: structural error-correction model, impulse response function, persistence

JEL Classification: C32, C51, E31, J30

Suggested Citation

Duarte, Rita and Robalo Marques, Carlos Manuel, The Dynamic Effects of Shocks to Wages and Prices in the United States and the Euro Area (July 7, 2009). European Central Bank Working Paper No. 1067, Available at SSRN: https://ssrn.com/abstract=1427234 or http://dx.doi.org/10.2139/ssrn.1427234

Rita Duarte (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Carlos Manuel Robalo Marques

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

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