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The author would like to thank Samir El-Khouri, Andrew Feltenstein, Samir Jahjah, Valadimir Klyner, Gene Leon, Wasseem Mina, Saleh Nsouli, Lucio Sarno, Gabriel Srour, and participants in IMF Institute departmental seminar for helpful comments.
The empirical literature on the cyclical behavior of the real wage can be classified into aggregate and disaggregate studies. The former includes Bodkin (1969), Neftci (1978), Geary and Kennan (1982), Sumner and Silver (1989), Cho and Cooley (1990), Cushing (1990), Kandil (1996) and Kandil and Woods (2002). Disaggregate studies include Bils (1985), Barsky and Solon (1989), Keane, Moffit and Runkle (1989), Solon, Barsky and Parker (1994), Kandil and Woods (1995, 1997), and Kandil (1999) and (2002b). For surveys of the empirical evidence, see Kniesner and Goldsmith (1987), and Abraham and Haltiwanger(1995).
Intuitively, firms are more reluctant to raise prices during expansions the higher the degree of market competition. In contrast, firms are more inclined to lower prices during contractions the higher the degree of market competition.
Intuitively, unions are more reluctant to raise wages during expansions the higher the degree of market competition. In contrast, unions are more inclined to lower wages during contractions, the higher the degree of market competition.
The real effects of the shocks may persist, however, if the monetary authority attempts to maintain the higher level of output by partially accommodating the increase in nominal prices. In this case, the higher the degree of accommodation is, the stronger and the longer lasting the wage-price spiral. The monetary authority is, therefore, able to maintain output at a higher level for a longer period of time but at the cost of a higher initial increase in prices and a longer period of inflation.
Quarterly data for real GNP or GDP and its deflator are not available over long time-series span for all countries. Where available, the results are robust with respect to alternative series for output and price. The effects of nominal GDP (aggregate demand) shocks, while correlated, are not distributed fully between CPI and industrial production. Hence, it is necessary to estimate separate equations for output and price.
Rather than focusing on money balances (illustrated in theory), the empirical investigation will test theory’s implications using a broad measure of aggregate demand. Since the data are for different countries, the effects of monetary shocks may be dependent on the stance of monetary policy, limiting implications for theoretical hypotheses under investigation.
The relative degree of monopoly power in labor and product markets may determine asymmetry of the real wage adjustment in the face of expansionary and contractionary demand shocks. Conditions on the supply side may establish, however, that nominal flexibility is asymmetric in the face of positive and negative demand shocks. Supply-side asymmetry may be the result of varying incentives for nominal wage indexation in the face of expansionary and contractionary demand shocks (see, e.g., Kandil (2002a)). The implication of this scenario is consistent with a higher degree of monopoly power in the labor market. Alternatively, Ball and Mankiw (1994) propose an explanation for asymmetric price adjustment in the face of expansionary and contractionary demand shocks. The implication of this scenario is consistent with a higher degree of monopoly power in the product market.
It is important to account for major sources of supply-side shifts to increase the accuracy of approximating the effects of demand shifts. Quarterly data are not available to measure productivity for various countries over time.
Cointegration test results reject the hypothesis of a common stochastic trend between the nonstationary dependent variables and nonstationary right-hand side variables (anticipated energy price and aggregate demand).
The energy price is measured by an index of average world crude petroleum price. This index is likely to capture the combined effects of fluctuations in the international price and the exchange rate on the supply side of the economy.
Shocks may have persistent effects if structural and/or institutional constraints interfere with agents’ ability to accommodate the shocks.
For example, price control measures may be in effect or the effect of supply shocks may be more dominant on price inflation.
Detailed coefficient estimates are available upon request.
Statistical significance is established by calculating the t-statistic for the asymmetry coefficient. The difference between the cumulative coefficients for positive and negative shocks is divided by the standard deviation of the difference.