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The Wage Price Spiral

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  • Olivier J. Blanchard

Abstract

This paper rehabilitates the old wage price spiral. It shows that, after an increase in aggregate demand, the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages. Under continuous price and wage setting, the process of adjustment would be instantaneous ; under staggering of price and wage decisions, the adjustment takes time. The more inflexible real wages and markups are to shifts in demand, the higher is the degree of price level inertia, the longer lasting are the effects of aggregate demand on output.

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File URL: http://www.nber.org/papers/w1771.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1771.

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Date of creation: Dec 1985
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Publication status: published as Blanchard, Olivier J. "The Wage Price Spiral," Quarterly Journal of Economics, Vol. 101, No. 406, pp. 545-565, August 1986.
Handle: RePEc:nbr:nberwo:1771

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