Monetary Policy, Productivity and Wages

Monetary policy has been tightened considerably in the recent past, while nominal wage growth has accelerated in the wake of energy price shocks. However, little is known about the impact of monetary policy on wages. Moreover, preliminary WIFO estimates suggest that, in the euro area, the effects of monetary policy on wages are at odds with the textbook New-Keynesian model: while labour productivity temporarily falls in response to monetary tightening, real wages and the labour share rise. These differences point to an important role of nominal rigidities. The research project aims at firstly, validating the preliminary empirical findings, secondly, extending the scope of the empirical investigation, and thirdly, proposing modifications to the canonical macro model to account for the previously found empirical results. Broadening the scope to include Anglo-American economies seems particularly important, as nominal wage rigidity may play a different role there than in the euro area, and hence the empirical results (and the implications for the theoretical model) may be different. Moreover, we will assess the relevance of monetary policy for different developments of the labour share over time – something that has not been researched at all so far – and we will improve our understanding of the impact of monetary policy on sectoral outcomes, in particular on sectoral wages and sectoral productivity. Methodologically, we will explore ways to obtain robust quarterly versions of monetary SVARs with residual ("narrative") restrictions, for which the identification scheme was originally designed for a monthly frequency. In the current economic environment of accelerating wage growth and monetary policy tightening, the proposed research is of direct relevance for economic policy.