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

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.