Dynamics and Monetary Policy in a Fair Wage Model of the Business Cycle

National Bank of Belgium Working Paper No. 98

49 Pages Posted: 9 Oct 2010

See all articles by David de la Croix

David de la Croix

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES); Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Gregory de Walque

Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences; National Bank of Belgium

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2010

Abstract

We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affects nominal interest rates and inflation outcomes.

Keywords: Efficiency wage, effort, inflation persistence, monetary policy

JEL Classification: E4, E5

Suggested Citation

de la Croix, David and de Walque, Gregory and de Walque, Gregory and Wouters, Rafael, Dynamics and Monetary Policy in a Fair Wage Model of the Business Cycle (October 12, 2010). National Bank of Belgium Working Paper No. 98, Available at SSRN: https://ssrn.com/abstract=1688937 or http://dx.doi.org/10.2139/ssrn.1688937

David De la Croix (Contact Author)

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES) ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium
+32 10 47 3945 (Fax)

HOME PAGE: http://www.de-la-croix.be

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Gregory De Walque

Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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