Do Higher Wages Cause Inflation?
AbstractMuch empirical evidence suggests that wage increases do not lead to inflation. This paper demonstrates that a 2-sector dynamic general equilibrium model calibrated to the U.S. economy is able to explain this evidence. We quantify the effect of an increased wage-markup on the inflation rate in both the goods sector and the service sector. The mechanisms we emphasize and quantify are changes in relative prices and monetary policy. We find that our model is successful in explaining the empirical evidence. Quantitatively, the relative price effect is more important than monetary policy in mitigating the effect of higher wage-markups.
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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 159.
Length: 48 pages
Date of creation: 01 Apr 2004
Date of revision:
Wage-markups; Relative prices; Monetary policy;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-07 (All new papers)
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- Jonsson, Magnus, 2004. "The Welfare Cost of Imperfect Competition and Distortionary Taxation," Working Paper Series 170, Sveriges Riksbank (Central Bank of Sweden).
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