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Do Higher Wages Cause Inflation?

Author

Listed:
  • Jonsson, Magnus

    () (Research Department, Central Bank of Sweden)

  • Palmqvist, Stefan

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

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.

Suggested Citation

  • Jonsson, Magnus & Palmqvist, Stefan, 2004. "Do Higher Wages Cause Inflation?," Working Paper Series 159, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0159
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    File URL: http://www.riksbank.se/upload/WorkingPapers/WP_159.pdf
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    References listed on IDEAS

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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, September.
    2. 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.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    4. 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.
    5. Ellen R. Rissman, 1995. "Sectoral wage growth and inflation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 15-28.
    6. Vincent Hogan, 1998. "Explaining the Recent Behavior of Inflation and Unemployment in the United States," IMF Working Papers 98/145, International Monetary Fund.
    7. 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.
    8. 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.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    10. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    11. 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 417-431, August.
    12. 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.
    13. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    14. Ali Dib, 2002. "Nominal Rigidities and Monetary Policy in Canada Since 1981," Staff Working Papers 02-25, Bank of Canada.
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    Citations

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    Cited by:

    1. Chen, Pu & Chihying, Hsiao, 2007. "Learning Causal Relations in Multivariate Time Series Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 1, pages 1-43.
    2. Jonsson, Magnus, 2004. "The Welfare Cost of Imperfect Competition and Distortionary Taxation," Working Paper Series 170, Sveriges Riksbank (Central Bank of Sweden).
    3. repec:eur:ejmsjr:36 is not listed on IDEAS

    More about this item

    Keywords

    Wage-markups; Relative prices; Monetary policy;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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