Working Paper: CEPR ID: DP217
Authors: Frederick van der Ploeg
Abstract: The development of the seven main OECD economies during the 1970s and 1980s is discussed. Subsequently, wage equations of the error-correction type for the seven largest OECD economies are estimated. The hypothesis of real wage rigidity cannot be rejected for the French, German, Italian and Japanese economies, but the Canadian, United Kingdom and United States economies display a significant degree of nominal wage rigidity. An analytical two-country model with floating exchange rates, uncovered interest parity, imperfect substitution between home and foreign goods, and sluggish labor markets is then formulated.
Keywords: policy coordination; floating exchange rates; fiscal and monetary policy; supply-side policy; wage rigidity
JEL Codes: 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in monetary growth (O42) | decrease in foreign output (F69) |
| increase in monetary growth (O42) | increase in home output (D13) |
| tax incentive (H20) | decrease in foreign output (F69) |
| tax incentive (H20) | increase in home output (D13) |
| fiscal expansion (home country) (E62) | increase in home output (D13) |
| fiscal expansion (both countries with real wage rigidity) (E69) | increase in relative price of home goods (D19) |
| increase in relative price of home goods (D19) | decrease in wage wedge between foreign producers and consumers (F16) |
| European fiscal expansion (in asymmetric world) (F42) | increase in home output (D13) |
| increase in US monetary growth (in asymmetric world) (E49) | increase in home output (D13) |
| US fiscal expansion (in asymmetric world) (E62) | decrease in home output (E20) |
| lack of international policy coordination (F42) | European fiscal stance (too tight from US perspective) (E62) |
| lack of international policy coordination (F42) | European fiscal stance (too loose from European perspective) (E66) |
| European fiscal stance (too tight from US perspective) (E62) | rising unemployment in Europe (F66) |
| European fiscal stance (too loose from European perspective) (E66) | rising unemployment in Europe (F66) |