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High Inflation and Real Wages

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Author Info
Benedikt Braumann
Abstract

Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/50.

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Length: 23 pages
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Handle: RePEc:imf:imfwpa:01/50

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Keywords: Inflation ; Wages ; Poverty ; Economic models ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank. [Downloadable!]
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  2. Alan C. Stockman, 1985. "Effects of Inflation on the Pattern of International Trade," NBER Working Papers 0713, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Benedikt Braumann, 2000. "Real Effects of High Inflation," IMF Working Papers 00/85, International Monetary Fund.
  4. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December. [Downloadable!] (restricted)
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This page was last updated on 2009-12-17.

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