Nominal rigidities and retail price dispersion in Canada over the twentieth century

Abstract We introduce a new data set on over 230,000 monthly prices for 10 goods in 50 Canadian cities over the 40‐year period from 1910 to 1950. This information, coupled with previously published price information from the late twentieth century, allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years. We find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s. Additionally, the process of retail market integration has followed a U‐shaped trajectory with many domestic markets being better integrated – as measured by the average dispersion of retail prices – at mid‐century than in the 1990s. We also consider the linkages between nominal rigidities and price dispersion, finding results consistent with present‐day data.     

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

When Borch's Theorem Does Not Apply: Some Key Implications of Market Incompleteness,with Policy Relevance Today

Markets are incomplete when the assets available to the agents do not span the space of future contingencies. In that case, competitive equilibria on the markets for assets and commodities fail (generically) to be constrained efficient. Pareto‐superior allocations can be implemented through price/wage rigidities and quantity constraints. However, nominal rigidities are conducive to multiple equilibria, implying endogenous macroeconomic uncertainties that compound the primitive (exogenous) uncertainties. This paper defines a temporary general equilibrium for which there exists a set of equilibria defining an inflation – unemployment locus. Various policy implications are drawn, with relevance to the current crisis.     

Real exchange rates,asset prices and terms of trade: A theoretical analysis

This paper develops a continuous-time two-country dynamic equilibrium model, in which the real exchange rates, asset prices, and terms of trade are jointly determined in the presence of nontradable goods. The model determines the relation between the financial markets and real goods markets in the world economy and their responses to various shocks under the home bias assumption. A positive domestic supply shock induces a positive return on the domestic asset markets and a deterioration of terms of trade that improves the foreign output and boosts the foreign asset markets. Demand shocks act in the opposite way. This model also analyses the impact of change in the relative price of nontradable to tradable goods on the terms of trade and asset markets. A higher productivity growth in tradable goods than in nontradable goods leads to a higher relative price of nontradable to tradable goods, which appreciates the real exchange rate, deteriorates the terms of trade, and depresses the domestic and foreign asset markets. A lower relative price of nontradable goods depreciates the real exchange rate, improves the terms of trade, and lifts both the domestic and foreign asset markets.     

How relevant are nominal contracting schemes for monetary policy?

Due to the scarcity of pertinent evidence, there is currently no general agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, the ranking of the welfare costs associated with alternative wage and price setting schemes is robust to changes in the monetary policy rule, and the ranking of the welfare costs associated with alternative monetary policy rules is robust to changes in the wage and price setting scheme. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.     

Local Manufacturing Hurt by Depreciations in a Theoretical Model Reflecting the Australian Experience

The model is motivated by data showing that the Australian production of local manufactures is hurt by depreciations and invigorated by appreciations. The paper briefly presents such evidence and then proceeds to a theoretical analysis. The model aims to capture short‐to‐medium run exchange rate effects in an economy with goods and services aggregated into four commodities: (i) imports; (ii) local manufactures; (iii) services; and (iv) rural goods (agricultural, pastoral, forestry, fishing and mining products). With the exception of rural goods, each commodity comprises consumer goods as well as inputs into the other sectors. Rural goods enter consumption only indirectly after processing by the manufacturing sector. Exports are exclusively rural goods. The model has a Keynesian flavour in that the production of local manufactures and services is not constrained by the availability of resources and of labour. Variable inputs per unit of output are assumed to be constant. There are also fixed inputs. Variable inputs are imports in the case of the import sector; rural goods and imports in the case of the local manufacturing sector; and labour in the case of the services sector. The prices of imports, local manufactures and services are set by constant mark‐up factors on variable costs. This assumption is based on a picture of imperfect competition with constant elasticity of demand at the firm level. The extreme capital intensity of rural goods production is taken into account by modelling total production of rural goods as an exogenous parameter. The price of rural goods is determined in the export market. It falls with increasing exports. The economy is not assumed to be small in its export market. The domestic consumption demand schedule is modelled as predetermined in the sense that in the time span under consideration the relationship between quantities consumed and nominal prices is not affected by the exchange rate. The nominal wage rate is assumed to be predetermined in the same sense. No specific functional form is imposed on the consumption demand schedule: the analysis is based on general assumptions, mainly non‐inferiority and gross substitutability. In view of gross substitutability, there is a competitive relationship between imports and local manufactures. Adepreciation raises the price of imports and ceteris paribus such an increase raises the consumption of manufactures. However, the analysis shows that this enhancing influence of a depreciation on manufacturing is weaker than other causal channels that work in the opposite direction. An increase in the price of imports (and exportables) raises variable costs and thereby the price of local manufactures. This leads to a decrease in the output of local manufactures. In the course of the analysis, it is first shown that a uniquely determined equilibrium exists for every exchange rate above a lower bound. Then the effects of a change in the exchange rate are investigated. In most cases the results are unambiguous. In particular this is true for the output and the price of local manufactures. Other conclusions are that a depreciation increases exports and the amount of services provided. In some cases unequivocal results can be obtained only with the help of further assumptions. This concerns the domestic price of rural goods, the balance of trade in domestic prices and import penetration.     

Trends in Disaggregated Import and Export Prices in Europe: Implications for the Trade and Wages Debate

We consider carefully the evidence from traded prices (as proxied by unit values) concerning the transmission of the effects of globalisation to domestic labour markets. Using standard index number techniques we decompose changes in sectoral import and export unit values into movements due to changes in pure prices of the initial bundle of goods imported or exported and changes due to upgrading of that bundle. Looking at the imports of selected European countries of textiles, clothing and footwear relative to engineering products we find evidence of strongly falling pure prices of the unskilled intensive products relative to the skilled products in the 1980s. This reinforces the view that import prices can capture the impact of globalisation in terms of falling relative prices for products produced with the intensive use of unskilled labour. However, the trends are not common across all the unskilled sectors; footwear is clearly an exception. In the absence of detailed domestic data, we look for reactions by domestic firms to increased import competition in movements in the price and composition of exports. We find evidence of stiff price competition from imports being associated with similar movements in export prices and no support for the view that import competition from low–wage countries has led to upgrading of the quality of exports.     

EXPERIMENTAL WORK ON SUBSIDIES,MORAL HAZARD,AND MARKET POWER IN AGRICULTURAL MARKETS

Laboratory markets are created to capture the important features of agricultural commodity markets. Sellers make production decisions and hold inventories before goods are sold. In a posted‐bid auction environment, price supports create a moral hazard for sellers. Part of the price‐support subsidy is transferred to buyers in the form of lower prices, which are close to those predicted by the buyers' Cournot level. The subsidy program is expensive for this reason. Lump‐sum payments correct the moral hazard problem and are better at transferring income to sellers. However, transfers made at the beginning of each production period cause a decline in production levels. (JEL D44, C92)     

Improving competition in the non-tradable goods and labour markets: the Portuguese case

This study assesses the macroeconomic impacts of increasing competition in the non-tradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring non-Ricardian characteristics, a multi-sectoral production structure and a number of nominal and real rigidities. We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase, driving consumption and output temporarily downwards.     

Monetary union: A welfare based approach

This article attempts to shed light on the consequences of the transition to EMU for individual welfare following specific shocks. To this end, we develop a two country intertemporal general equilibrium model that extends the Obstfeld and Rogoff (Journal of Political Economy 103 (3) (1995) 624) specification to nominal rigidities through price adjustment costs and pricing-to-market behavior.We show that, when facing a positive asymmetric permanent shock to either technology or government expenditures occurring in one country, implementing a monetary union is beneficial to the households living in this economy. Conversely, it is detrimental to foreigners. Further, a sensitivity analysis shows that if the gains/losses to implementing monetary union are qualitatively robust when facing changes in the degree of nominal rigidities and the elasticity of substitution between foreign and domestic goods, they are quite sensitive to the degree of pricing-to-market in the economy.     

Prices,Productivity and Wage Bargaining in Open Economies*

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product‐market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product‐market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.     

Wage and price determination in a labour-exporting economy: The case of Ireland

A model designed to incorporate external influences through the labour and goods markets on the rates of domestic wage and price inflation is specified and estimated from postwar Irish data. It consists of equations explaining the rate of change of prices, migration, the supply of labour, the rate of change of wages and three identities. The model is both simultaneous and nonlinear, and an appropriate modification of the two-stage least-squares estimation technique is used. The estimated equations explain between 71 percent and 84 percent of the variance in the dependent variables. Since two of these are proportionate first differences, the remaining two a ratio and a first difference, this might be deemed satisfactory. However, some of the individual coefficient estimates are not.     

Fair wages in a New Keynesian model of the business cycle

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics—notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.     

Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

International diversification and industry-related labor income risk

Do equity markets help diversifying away industry-related labor income risk? This paper reconsiders the hedging role of stock markets by focusing on international equity diversification, rather than domestic asset allocation, and on industry wage, rather than individual labor income. We compare industry-based portfolio holdings to the one that is optimal for an investor endowed with the average home-country labor income. Our results resurrect the role of equities in hedging wage risk by uncovering remarkable heterogeneity across industries within each investing country. Our analysis also delivers insights concerning the role of occupational pension funds in designing optimal portfolios for their members.     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

Rigid labour markets with trade and capital mobility: theory and evidence

Abstract We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

Macroeconomic Effects of Asset‐Price Shocks in a Globalized Financial Market

In this paper, I study a model in which shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset‐price shocks, but more vulnerable to foreign asset‐price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.