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Do Higher Wages Cause Inflation?

  • Jonsson, Magnus


    (Research Department, Central Bank of Sweden)

  • Palmqvist, Stefan


    (Monetary Policy Department, Central Bank of Sweden)

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    Much empirical evidence suggests that wage increases do not lead to inflation. This paper demonstrates that a 2-sector dynamic general equilibrium model calibrated to the U.S. economy is able to explain this evidence. We quantify the effect of an increased wage-markup on the inflation rate in both the goods sector and the service sector. The mechanisms we emphasize and quantify are changes in relative prices and monetary policy. We find that our model is successful in explaining the empirical evidence. Quantitatively, the relative price effect is more important than monetary policy in mitigating the effect of higher wage-markups.

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    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 159.

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    Length: 48 pages
    Date of creation: 01 Apr 2004
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0159
    Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
    Web page:

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    1. N. Gregory Mankiw & Ricardo Reis, 2003. "What Measure of Inflation Should a Central Bank Target?," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1058-1086, 09.
    2. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
    3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    4. Jordi Galí & Mark Gertler & J. David López-Salido, 2007. "Markups, Gaps, and the Welfare Costs of Business Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 44-59, November.
    5. Daniel Aaronson, 2001. "Price Pass-Through And The Minimum Wage," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 158-169, February.
    6. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 3-18, February.
    7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    8. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    9. Ali Dib, 2002. "Nominal Rigidities and Monetary Policy in Canada Since 1981," Staff Working Papers 02-25, Bank of Canada.
    10. Vincent Hogan, 1998. "Explaining the Recent Behavior of Inflation and Unemployment in the United States," IMF Working Papers 98/145, International Monetary Fund.
    11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    12. Ghali, Khalifa H, 1999. "Wage Growth and the Inflation Process: A Multivariate Cointegration Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 417-31, August.
    13. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 299-316, June.
    14. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
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