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Second-Round Wage-Price Effects of Raw Material Costs: An Empirical Analysis Using a DSGE Model

Author

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  • Ko Adachi

    (Bank of Japan)

  • Naoya Kato

    (Bank of Japan)

Abstract

This paper empirically examines the second-round effect of raw material price increases using a DSGE model. Specifically, it explores how price increases driven by rising raw material costs spill over into wages, which then feed back into prices. The analysis focuses on Japan and Europe, which share similar structures in terms of raw material inputs. The results show that the first-round effect, which captures the pass-through of rising raw material costs to prices, is slower in Japan than in Europe. On the other hand, the second-round effect through wages is gradual but persistent in both Japan and Europe. Furthermore, during the period of high inflation since 2020, the first-round effect of higher raw material costs was the main driver of inflation in both Japan and Europe, while the second-round effect contributed to the persistence of inflation. The paper also suggests that the recent changes in wage rigidity in Japan may have strengthened the second-round effect.

Suggested Citation

  • Ko Adachi & Naoya Kato, 2025. "Second-Round Wage-Price Effects of Raw Material Costs: An Empirical Analysis Using a DSGE Model," Bank of Japan Working Paper Series 25-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp25e10
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    Keywords

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    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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