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Wage Rigidity Impacts on Unemployment and Inflation Persistence in Tunisia: Evidence from an Estimated DSGE Model

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Abstract

This paper analyzes the effects of nominal wage rigidity on inflation persistence and unemployment using a dynamic stochastic general equilibrium model for the Tunisian economy. The model is estimated by using the Bayesian approach for a small open economy, allowing to simultaneously introduce nominal wage rigidity and unemployment in the labor market. Our main finding is that in the Tunisian context, the interest rate effects are mainly limited by the wage policy. The paper also provides estimates of the nominal wage rigidity implications on unemployment. Indeed, in a context of wage rigidity, a tightening monetary policy results in a slowdown in the activity level and an increase in the unemployment rate. A 1% increase in the interest rate causes prices to decrease by only 0.02%, while the unemployment rate rises by 0.2%. These results have important considerations for the monetary authorities in Tunisia. Dealing with nominal wage rigidities would be necessary in order to allow a better transmission of the monetary policy.

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Notes

  1. Wage growth in the world is about 1.7% in 2015, according to the Global Report on 2016/17 wages “Wage inequality in the workplace.”

  2. \((b{C}_{j,t-1})\) allows to apprehend consumption evolution persistence after a chock.

  3. In the steady state E [\({\xi }_{t}^{i}]\) = 1 et = \({\xi }_{t}^{i}\)(\({\xi }_{t}^{i}-1), i\in \left\{c,N\right\}\) (see Adolfson et al., 2007 for more details).

  4. \({\xi }_{t}^{N}{A}_{L}{\iota }^{{\sigma }_{L}}\) is the household disutility (\(\iota )\) if employed and 0 if not.

  5. See Adolfson et al. (2007), Christiano et al. (2005) for more details.

  6. 1/ϕ is the measure of a unit of work offered by the household following a 1% increase in real wages. At equilibrium, the disutility of working more must be offset by what the real wage can buy in terms of utility. For more details, see Gali et al. (2012).

  7. \({O}_{t}\) is < 1 if consumption increases more rapidly than this regular trend \({z}_{t}\).

  8. See Gali et al. (2012) for more details.

  9. The separation rate s = 0.035 is standard in the empirical literature and supported by strong empirical evidence (see Gertler et al., 2008; Bodart et al., 2006).

  10. « This filter can be interpreted as a Bayesian recursive process for the estimation of latent variable vectors». (Adjemian & Devulder, 2011).

  11. The Calvo price implies that the average pricing for a company is 1/ 1- ξ.

  12. See (Vangu, 2014).

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Acknowledgements

We are very grateful to Professor Grégory Levieuge for his helpful comments and suggestions.

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Correspondence to Kawther Alimi.

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Alimi, K., Chakroun, M. Wage Rigidity Impacts on Unemployment and Inflation Persistence in Tunisia: Evidence from an Estimated DSGE Model. J Knowl Econ 13, 474–500 (2022). https://doi.org/10.1007/s13132-021-00751-8

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