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THE RELATIVE STICKINESS OF WAGES AND PRICES
Author(s) -
SPENCER DAVID E.
Publication year - 1998
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1998.tb01700.x
Subject(s) - economics , shock (circulatory) , relative price , real wages , wage , business cycle , exploit , empirical evidence , demand shock , aggregate demand , monetary economics , labour economics , keynesian economics , monetary policy , computer science , medicine , philosophy , computer security , epistemology
While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post‐war U.S. (JEL E32)