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Wage-Price Spirals: A Risk-Based Approach

Author

Listed:
  • Michal Franta
  • Jan Vlcek

Abstract

The discussion about wage-price spirals has revived recently due to the wave of elevated inflation. We propose a framework based on quantile regression to assess the risk of simultaneous rapid growth in wages and prices. We show that for the UK and US, the risk of such growth in wages and prices coincides with the risk of their heightened persistence or even acceleration. The materialization of the risk then defines the occurrence of a wage-price spiral. The proposed framework allows us to identify forthcoming episodes of elevated wage-price spiral risk and episodes of its materialization. Moreover, we show that the risk of a wage-price spiral varies with the usual business cycle factors and monetary policy. Based on the outcomes, we suggest general lessons for policymakers. Finally, the framework is also applied to the Czech Republic to show its usefulness and properties in the case of short time series.

Suggested Citation

  • Michal Franta & Jan Vlcek, 2024. "Wage-Price Spirals: A Risk-Based Approach," Working Papers 2024/1, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2024/1
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2024_01.pdf
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    More about this item

    Keywords

    Inflation; inflation and wage growth at risk; quantile regression; wage-price spiral;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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