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The Microfoundations of the Keynesian Wage-Price Spiral

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  • Malikane, Christopher

Abstract

We derive the backward-looking Keynesian wage-price spiral from micro-foundations. The optimal price Phillips curve features one lag of price inflation, the lag of the labour share, excess demand pressure, speed-limit effects and supply shocks. The wage Phillips curve features current and lagged price inflation, excess demand pressure up to the second lag, and the lag of nominal wage inflation. We estimate this model for six developed and emerging market economies and find that the model fits the data well. In general, nominal wages are more flexible than prices with respect to demand pressure. The baseline model rejects the inclusion of supply shocks and indexation of wages in developed economies and some emerging markets.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42923.

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Date of creation: 29 Nov 2012
Date of revision: 2012
Handle: RePEc:pra:mprapa:42923

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Keywords: microfoundations; wage and price Phillips curves; forward and backward-looking behaviour;

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