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Do wages help predict inflation?

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  • Kenneth M. Emery
  • Chih-Ping Chang
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    Abstract

    In the financial press, productivity-related wages are often cited as an inflation indicator. For example, recently slow rates of wage growth have been noted as a factor that will keep inflation rates low in the future. While inflation and wage growth do appear to be highly correlated over longer time periods, it is not clear whether movements in wage growth precede movements in inflation, thereby providing predictive content for future inflation. In this article, Kenneth Emery and Chih-Ping Chang examine the usefulness of wage growth as a predictor of inflation, as well as carry out a stability analysis of the relationship underlying inflation and wages. The results caution against using wage growth as a signal of future inflation in that wage growth has no information content for future inflation. Furthermore, the bivariate relationship between inflation and wage growth is shown to be unstable.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1996/er9601a.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1996)
    Issue (Month): Q I ()
    Pages: 2-9

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    Handle: RePEc:fip:fedder:y:1996:i:qi:p:2-9

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    Keywords: Inflation (Finance) ; Wages;

    References

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    1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    2. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
    3. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
    4. Yash P. Mehra, 1993. "Unit labor costs and the price level," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 35-52.
    5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    6. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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    Cited by:
    1. Attilio Zanetti, 2007. "Do Wages Lead Inflation? Swiss Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(I), pages 67-92, March.
    2. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jul).
    3. Yash Mehra, 2000. "Wage-price dynamics : are they consistent with cost push?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-43.

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