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Do Higher Wages Cause Inflation?

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Author Info
Jonsson, Magnus () (Research Department, Central Bank of Sweden)
Palmqvist, Stefan () (Monetary Policy Department, Central Bank of Sweden)

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Abstract

Much 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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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 159.

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Length: 48 pages
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:hhs:rbnkwp:0159

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Related research
Keywords: Wage-markups; Relative prices; Monetary policy;

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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

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  1. Jonsson, Magnus, 2004. "The Welfare Cost of Imperfect Competition and Distortionary Taxation," Working Paper Series 170, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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