Working Paper: CEPR ID: DP256
Authors: George Alogoskoufis
Abstract: In this paper I investigate the relationships between wage adjustment, competitiveness, and aggregate fluctuations in the United Kingdom. This is done in the context of a model based on the distinction between internationally traded and nontraded goods, which is estimated and thoroughly tested. The traded goods sector is assumed to be a price-taker, and the focus is on the supply side. Competitiveness is defined as the relative price of traded to nontraded goods. The model can account quite well for fluctuations in UK competitiveness, output, wages and the terms of trade, and is used to examine the macroeconomic effects of a variety of disturbances. The results suggest that the UK economy is characterized by output flexibility and wage-price rigidity, a combination that produces patterns of macroeconomic adjustment which parallel the predictions of Keynesian demand-side models.
Keywords: traded goods; competitiveness; wages; macroeconomic fluctuations; United Kingdom
JEL Codes: J31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competitiveness (L11) | Real Wages (J31) |
| GDP (E20) | Competitiveness (L11) |
| Government Expenditure (H59) | Output (Y10) |
| Government Expenditure (H59) | Competitiveness (L11) |
| Nominal Shocks (E39) | Output (Y10) |
| Real Wages (J31) | Output (Y10) |