The euro area inefficiency gap

Jordi Galí (), Mark Gertler () and López-Salido, David ()
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Jordi Galí: Centre de Recerca en Economia Internacional
López-Salido, David: Banco de España

No 302, Banco de España Working Papers from Banco de España

Abstract: We construct a measure of Euro area cyclical efficiency, following the approach developed in Galí, Gertler and López-Salido (2002). Our measure –which we call "the gap"– corresponds to the inverse of price over social marginal cost. Here we present a time series of this gap for the Euro area, as well as its two components, the price and wage markups. As with U.S. data, the ineficiency gap is highly procyclical, and driven largely by countercyclical movements in the wage markup. We are also able to use our gap variable to derive a theory-based measure of the output gap for the Euro area, which we can compare to other measures often used in applications. We also show that the wage markup moves closely with the unemployment rate, as theory would suggest. Finally, we discuss briefly the implications for monetary policy of alternative interpretations of our evidence.

Keywords: Business Cycles; Countercyclical Markups; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Date: 2003-04
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Persistent link: http://EconPapers.repec.org/RePEc:bde:wpaper:0302

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