Causal relationship between prices and wages: VECM analysis for Germany

Hoxha Adriatik ()
Additional contact information
Hoxha Adriatik: Department of Economics, Faculty of Economy, University of Prishtina

EuroEconomica, 2010, issue 26, 90-106

Abstract: The literature on causality as well as the empirical evidence clearly shows that there are two opposing groups of economists, who support different hypotheses with respect to the flow of causality in the price-wage causal relationship. The first group argues that causality runs from wages to prices, whereas the second argues that effect flows from prices to wages. Nonetheless, there is at least some consensus that researcher’s conclusions may be contingent on the type of data employed, applied econometric model, or even that the relationship may vary through economic cycles. This paper empirically examines the price-wage causal relationship in Germany, by using OLS and VECM analysis, and it also provides robust evidence in support of a long-run unilateral causal relationship between prices and wages, running from wages to prices. In contrast, the evidence suggests that there is no statistically significant short-run relationship between prices and wages. Prior to designing and estimating the econometric model we have performed stationarity tests for the employed price, wage and productivity variables. Additionally, we have also specified the model taking into account the lag order as well as the rank of co-integration for the co-integrated variables. Furthermore, we have also applied respective restrictions on the parameters of the estimated VECM. The evidence resulting from model robustness checks indicates that results are statistically robust. Although far from closing the issue of causality between prices and wages, this paper at least provides solid evidence for the case of Germany.

Keywords: Causality; Co-integration; Granger; Determinants of Inflation; VECM (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/719/656 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dug:journl:y:2010:i:26:p:90-106

Access Statistics for this article

More articles in EuroEconomica from Danubius University of Galati Contact information at EDIRC.
Bibliographic data for series maintained by Florian Nuta ().