Theoretical and Applied Economics
No. 1 / 2016 (606), Spring
Analysis of the causal link between wages and prices in UK
University of Prishtina
Abstract. As a matter of fact, the consensus of empirical evidence on the wage-price causal relationship reveals that there are two opposing groups of economists supporting conflicting hypotheses with respect to the flow of causality. Equally importantly, the literature review suggests that there is at least some consensus in the fact that inferences of researchers depend on the sample length, type of data employed, applied econometric model, or at the same time the relationship may be subject to the dynamics of economic cycles. In the light of these arguments, this paper conducts an empirical investigation of the wage-price causal relationship in UK by utilizing VAR and VECM models. Prior to designing and estimating econometric models the relevant stationarity tests for the wage, price and productivity variables have been performed. In summary, all three time series data are non-stationary and thus need to be differenced once in order to render them stationary. Correspondingly, the relevant cointegration tests have been performed and they provide robust evidence in support of a strong cointegration relationship between wages and prices. Additionally, respective restrictions on the parameters of estimated models have also been applied in order to derive the most parsimonious model. Regardless of the fact that VAR models tentatively indicate unilateral causality running from prices to wages, the VECM analysis only suggests a strong cointegration relationship and negates short-run causality in any direction. Accordingly, the estimated models have been subjected to diagnostic testing procedures, and these tests firmly indicate that estimated results are statistically robust. At the same time the restricted VECM model provides estimate on the basis of which it can be argued that the assumption of rational expectations in the wageprice relationship is perfectly valid.
Keywords: Granger Causality, Cointegration, VAR, VECM.
Contents
- Female entrepreneurial activity in Romania
Annamária DÉZSI-BENYOVSZKI
Tünde Petra SZABÓ
Ágnes NAGY
- Analysis of the causal link between wages
and prices in UK
Adriatik HOXHA
- Assessing the regional development degree – step one: Calibrating the polar diagram
Cătălin Daniel DUMITRICĂ
Teodora I. BIŢOIU
Dragoş DINCĂ
- The relationship between output and asset prices:
A time – and frequency – varying approach
Chi-Wei SU
Zong-Liang YAO
Hsu-Ling CHANG
- Territorial patterns of development
in the European Union
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Constantin POSTOIU
- Nexus between defense expenditure and economic growth
in BRIC economies: An empirical investigation
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Debi Prasad BAL
Manoranjan SAHOO
- Efficiency, non-linearity and chaos: evidences from BRICS
foreign exchange markets
Anoop S. KUMAR
Bandi KAMAIAH
- A theoretical examination of tax evasion
among the self-employed
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- Long-term effects of the investments dynamics in Romania
in the post-accession period – a regional approach
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Georgiana MORARU
- A utility based theoretical model
for the income-life expectancy curve
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- Essentials aspects on macroeconomic variables
and their correlations
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Alexandru MANOLE
Mădălina Gabriela ANGHEL
Aurelian DIACONU
- Macroeconomic strategies for the prevention
of economic and financial crisis
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Alexandru Cătălin POPA
- Does tourism affect economic growth in Indian states?
Evidence from panel ARDL model
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Ummalla MALLESH
Jaganath BEHERA
- Sovereign debt crisis.
From challenges to solutions
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Andrei GIURESCU
- International trade and tourism for Mediterranean countries:
A panel causality analysis
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- Economic freedom index and stock returns in Malaysia
Devinaga RASIAH
Tay Lee YING
Sakiru Adebola SOLARIN
- How budget deficit and current account deficit
are interrelated in Indian economy
U.J. BANDAY
Ranjan ANEJA
- Study regarding the influence of the endogenous
and exogenous factors on credit institution’s return on assets
Maria-Daciana RODEAN (COZMA)
Nicolae BALTEŞ