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Real wages and aggregate demand shocks: contradictory evidence from VARs

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  • Lastrapes, William D.

Abstract

This paper revisits two recently published estimates (in Gamber and Joutz 1993, and Spencer 1998) of the dynamic effects of aggregate demand shocks on real wages. Despite identical data and similar reliance on long-run restrictions to identify the economic structure of a VAR model of real wages, productive activity and unemployment, the studies' findings are contradictory. I conclude that the sensitivity of these estimates is due to differences in the treatment of a potential deterministic trend in the unemployment rate. To enhance robustness of the estimated responses, I incorporate other variables into the VAR (money, interest rates and prices) and employ long-run monetary neutrality as the primary identifying restriction. I find that real wages respond positively to money supply, or aggregate demand, shocks, implying that nominal output prices are more rigid than wages in the face of such shocks. Furthermore, there is no evidence of absolute nominal wage rigidity in response to money supply shocks. The approach of this paper and its findings improve our confidence in the use of VARs with long-run restrictions.
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  • Lastrapes, William D., 2002. "Real wages and aggregate demand shocks: contradictory evidence from VARs," Journal of Economics and Business, Elsevier, vol. 54(4), pages 389-413.
    • Handle: RePEc:eee:jebusi:v:54:y:2002:i:4:p:389-413
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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
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    Cited by:

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    2. Halabi, Claudia E. & Lastrapes, William D., 2003. "Estimating the liquidity effect in post-reform Chile: do inflationary expectations matter?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 813-833, November.

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    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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