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

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  • Van Der Ploeg, Frederick
  • Willems, Tim

Abstract

After the post-Covid rise in inflation, a debate has emerged whether this inflation is "seller-driven" and, if so, how policy should respond. We build a model to capture the underlying distributional conflict between wage- and price-setters both wishing to attain a certain markup. We highlight a new "aspirational channel" of monetary transmission: by influencing cyclical conditions, a central bank can control inflation through affecting markup aspirations of workers and firms. We establish conditions under which an inflationary situation characterized by inconsistent aspirations requires a reduction in economic activity, to push demands of workers and firms towards consistency. We find that countercyclical markups and/or a flat Phillips curve call for more "dovish" monetary policy (responding less to inflation deviations, more to the output gap). Estimating price markup cyclicality across 43 countries, we find that contractionary monetary shocks indeed have stronger anti-inflationary effects in countries with greater markup procyclicality.

Suggested Citation

  • Van Der Ploeg, Frederick & Willems, Tim, 2023. "Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission," CEPR Discussion Papers 18436, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18436
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    Keywords

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    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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