Speaker:Gert Peersman (Ghent University)
Venue: MNB-Visitor Centre
Time: 15:15 pm, Wednesday, May 5, 2010
Abstract:
This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages and amplifying the ultimate repercussions on inflation. Based on a standard DSGE model, we show that these stylized facts can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. We argue that both features go hand in hand and can be considered as two sides of the same coin, that is the monetary policy regime.
JEL classification: C32, E24, E31, E42, E52
Keywords: technology shocks, second-round effects, Great Inflation