Firm-Level Distributional Consequences of Monetary Policy and Wage Bargaining Agreements

Project Start:01/2018
Researchers:Ester Faia, Nan Hu, Sören Karau, Vincenzo Pezone, Raffaele Saggio, Yiran Wei
Category: Money and Finance
Funded by:LOEWE

During the Great Recession it became evident both to policymakers and to researchers that monetary policy can have heterogeneous impact across agents and that those distributional consequences might be even more important than its aggregate ones in terms of allocational efficiencies.

Unfortunately, little or none has been written about its role for financial markets and mostly for the firm-level distributional allocations. We wish to assess how monetary policy can affect asset prices and real outcomes differently across firms, focusing in particular on their ability to adjust wages. Our work builds upon classic theoretical work by Taylor (1979) and Fischer (1979). Intuitively, if wages are negotiated for different firms or sectors in a staggered fashion, monetary policy shocks should have a larger impact on the valuation of firms that happen to be further away from a wage renegotiation. These models provide simple and powerful microfoundations for the importance of monetary policy; yet, researchers have not been able so far to test them formally.

We are the first to propose a rigorous test of these models, thanks to our access to a unique employee-employer matched dataset available at the Italian National Institute of Social Security (INPS), that covers all relevant information on the universe of the Italian workers. We match this data with hand-collected information on the timing of renewals of collective agreements, and with stock market variables at high-frequency. We measure monetary policy surprise shocks through the Gürkaynak, Sack and Swanson (2005) methodology. We follow Gorodichenko and Weber (2016), and relate stock market volatility to nominal rigidity, proxied by the distance to contractual renewals.

Our preliminary results are encouraging, and remarkably in line with our hypothesis. Stock market and employment responses to monetary policy shocks depend strongly on our measure of nominal rigidity. We are planning to further validate the robustness of our results, examine other real outcomes, such as investment and revenues, and obtain additional micro-evidence, moving from a firm-level to a worker-level analysis.

Finally, we will rationalize the empirical results through a model with nominal rigidities and staggered wage bargaining (comparing collective versus individual-Nash) along the lines of Faia, Lechthaler and Merkl (2014). Our preliminary calibrations suggest that our model matches quite well the reduced-form results produced so far.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
242Ester Faia, Vincenzo PezoneThe Heterogeneous Cost of Wage Rigidity: Evidence and Theory2019 Money and Finance