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Do Higher Wages Cause Inflation?

Author

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  • 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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    Cited by:

    1. Chen, Pu & Chihying, Hsiao, 2007. "Learning Causal Relations in Multivariate Time Series Data," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), 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. Sorina Koti & Tomi Bixho, 2016. "Theories of Money Supply: The Relationship of Money Supply in a Period of Time T-1 and Inflation in Period T- Empirical Evidence from Albania," European Journal of Multidisciplinary Studies Articles, Revistia Research and Publishing, vol. 1, January -.
    4. Vasile-Aurel Caus & Daniel Badulescu & Mircea Cristian Gherman, 2017. "Using Wavelets In Economics. An Application On The Analysis Of Wage-Price Relation," Oradea Journal of Business and Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 32-42, March.
    5. M. A. Ivanova, 2016. "Analysis of the nature of cause-and-effect relationship between inflation and wage in Russia," Studies on Russian Economic Development, Springer, vol. 27(5), pages 575-584, September.

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    More about this item

    Keywords

    Wage-markups; Relative prices; Monetary policy;
    All these keywords.

    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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