Inflation Differentials in a Currency Union: A DSGE Perspective
Cross country studies of infiation differentials, in particular in the EMU, have focused on three explanations: (i) the role of tradable and nontradable sector technology shocks and the Balassa-Samuelson effect, (ii) the role of the demand-side effects, and (iii) heterogeneity of infiationary processes inside the EMU. This paper estimates a two country, two sector Dynamic Stochastic General Equilibrium (DSGE) model with nominal rigidities in a currency union using data for Spain and the euro area, to understand the role of each feature in shaping infiation differentials. The paper finds that tradable sector technology shocks are the most important source of infiation differentials, while nontradable sector technology shocks help explain nontradable infiation only, and demand shocks help explain a fraction of output growth, but not of infiation dispersion. In addition, the estimated model finds evidence against infiation dynamics being different in Spain and in the rest of the euro area.
What Explains the Widening Wage Gap? Outsourcing vs. Technology
The relative rise of wages for high-skilled workers over the last three decades has been the subject of intense academic and popular scrutiny. This paper develops a new methodology for decomposing wage changes into three sources: outsourcing, biased technological change, and total biased technolog- ical change. We find that for the 1980-1999 period the change in outsourcing accounts for between 28 and 36 percent of the observed wage change, and biased technological change for another 15-19 percent in the US. Jointly these two forces (total biased technological change) explain 58 percent of the wage change. In sum, we find that outsourcing and biased technological change can account for a large share of the observed divergence in the skilled wage premium.