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The euro area inefficiency gap

Author

Listed:
  • Jordi Galí

    (Centre de Recerca en Economia Internacional)

  • Mark Gertler

    (New York University)

  • J. David López-Salido

    (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.

Suggested Citation

  • Jordi Galí & Mark Gertler & J. David López-Salido, 2003. "The euro area inefficiency gap," Working Papers 0302, Banco de España.
    • Handle: RePEc:bde:wpaper:0302
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0302e.pdf
    File Function: First version, April 2003
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    References listed on IDEAS

    as
    1. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 223-250, January.
    2. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
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    4. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    5. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    6. Jordi Galí & Mark Gertler & J. David López-Salido, 2007. "Markups, Gaps, and the Welfare Costs of Business Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 44-59, November.
    7. Gali, Jordi, 1996. "Unemployment in dynamic general equilibrium economies," European Economic Review, Elsevier, vol. 40(3-5), pages 839-845, April.
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    9. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    10. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007, Elsevier.
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    Cited by:

    1. Patrick Feve & Julien Matheron & Guillaume Sahuc, 2010. "Désinflation et chômage dans la zone euro : une analyse à l'aide d'un modèle var structurel," Annals of Economics and Statistics, GENES, issue 99-100, pages 365-394.
    2. Nucci, Francesco & Riggi, Marianna, 2018. "Labor force participation, wage rigidities, and inflation," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 274-292.

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    More about this item

    Keywords

    Business Cycles; Countercyclical Markups; Monetary Policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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