Are Real Wages Procyclical Conditional on a Monetary Policy Shock?

Eunseong Ma

Departmental Working Papers from Department of Economics, Louisiana State University

Abstract: It is well-known that real wages are procyclical conditional on a monetary policy shock. This paper challenges this conventional view by using a quantitative heterogeneous-agent New Keynesian economy with sticky wages. In the model with benchmark calibration, the wage rate per effective unit of labor decreases following a monetary expansion, while the data-consistent real wages (average hourly earnings) increase. This implies that true real wages may be countercycli- cal conditional on a monetary policy shock, but the data may predict the wrong direction of real wages due to the inconsistent definition. Therefore, the predictions of New Keynesian models with wage rigidities are consistent with the data.

Date: 2020-10
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Persistent link: https://EconPapers.repec.org/RePEc:lsu:lsuwpp:2020-06

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