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Wages and prices in the euro area: exploring the nexus

Author

Listed:
  • Antonio M. Conti

    () (Bank of Italy)

  • Andrea Nobili

    () (Bank of Italy)

Abstract

We investigate the structural relationship between wages dynamics and core inflation in the euro area using Bayesian VAR models. We find that the pass-through from wages to consumer prices net of food and energy is less than unity and depends on the nature of the shocks hitting the economy. A monetary policy shock implies a positive co-movement between these variables, which is similar in magnitude to that stemming from an aggregate demand shock. Financial shocks, as captured by credit spreads and indicators of systemic stress, are instead associated with a negative co-movement between wages and prices and generate firms’ countercyclical mark-ups, consistently with recent models featuring financial frictions and nominal rigidities. These findings may explain why the recent pick-up in wages is not associated with a sustained path of core inflation in the euro area.

Suggested Citation

  • Antonio M. Conti & Andrea Nobili, 2019. "Wages and prices in the euro area: exploring the nexus," Questioni di Economia e Finanza (Occasional Papers) 518, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_518_19
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2019-0518/QEF_518_19.pdf
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    References listed on IDEAS

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    Cited by:

    1. Nicoletta Batini & Alessandro Cantelmo & Giovanni Melina & Stefania Villa, 2020. "How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area," IMF Working Papers 20/86, International Monetary Fund.

    More about this item

    Keywords

    wage-price pass-through; countercyclical mark-ups; financial shocks; Bayesian VAR;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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