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Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission

Author

Listed:
  • Frederick van der Ploeg

    (University of Oxford, University of Amsterdam and CEPR)

  • Tim Willems

    (Bank of England)

Abstract

Since the post‑Covid rise in inflation has been accompanied by strong wage growth, the distributional conflict between wage and price‑setters (both wishing to attain a certain markup) has regained prominence. We examine how a central bank should resolve a ‘battle of the markups’ when aspired markups are cyclically sensitive, highlighting a new ‘aspirational channel’ of monetary transmission. We establish conditions under which an inflationary situation characterised by inconsistent aspirations requires a reduction in economic activity, to eliminate worker‑firm disagreement over the appropriate level of the real wage. We find that countercyclical markups and/or a flat Phillips curve call for more dovish monetary policy. Estimating price markup cyclicality across 44 countries, we find that monetary contractions are better able to lower inflation when markups are procyclical.

Suggested Citation

  • Frederick van der Ploeg & Tim Willems, 2024. "Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission," Bank of England working papers 1065, Bank of England.
    • Handle: RePEc:boe:boeewp:1065
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; wage-price dynamics; markups; monetary policy transmission; Taylor principle; determinacy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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