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The impact of labor cost growth on inflation in selected CESEE countries

Author

Listed:
  • Clara De Luigi

    (Oesterreichische Nationalbank, Foreign Research Division)

  • Florian Huber

    (Vienna University of Economics and Business (WU))

  • Josef Schreiner

    (Oesterreichische Nationalbank, Economic Analysis Division)

Abstract

We analyze the relationship between labor cost and inflation in selected economies in Central, Eastern and Southeastern Europe (CESEE) by using a medium-scale time-varying parameter vector autoregressive model. The proposed framework makes it possible to control for potential movements in the underlying transmission mechanisms, stochastic volatility and flexible model selection. We use our model to simulate the effect of an unexpected labor cost shock and assess the dynamic reaction of inflation over the estimation period. Our findings indicate that a 1 percentage point increase in unit labor cost translates into higher inflation rates in most countries considered. However, the magnitude of the inflation reaction is very heterogeneous across countries and over time: the lowest response was observed for Bulgaria between 2008 and 2012 and the highest median response for Hungary between 2005 and 2007 (more than 0.4 percentage points). Moreover, we find that the wage-inflation pass-through weakened after the global financial crisis for most countries under consideration.

Suggested Citation

  • Clara De Luigi & Florian Huber & Josef Schreiner, 2019. "The impact of labor cost growth on inflation in selected CESEE countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/19, pages 56-78.
    • Handle: RePEc:onb:oenbfi:y:2019:i:q4/19:b:1
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    References listed on IDEAS

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    Cited by:

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    3. Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Volodymyr Tulin & Richard Varghese, 2021. "Wage growth and inflation in Europe: a puzzle?," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1427-1453.

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    More about this item

    Keywords

    inflation; pass-through; labor cost; Bayesian methods; time-varying parameters;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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