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High Inflation and Real Wages

Author

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  • Benedikt Braumann

Abstract

Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.

Suggested Citation

  • Benedikt Braumann, 2001. "High Inflation and Real Wages," IMF Working Papers 01/50, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/50
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=4067
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    References listed on IDEAS

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    1. Alan C. Stockman, 1985. "Effects of Inflation on the Pattern of International Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 587-601, August.
    2. Benedikt Braumann, 2000. "Real Effects of High Inflation," IMF Working Papers 00/85, International Monetary Fund.
    3. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-1329, December.
    4. Helpman, Elhanan & Leiderman, Leonardo, 1990. "Real wages, monetary accommodation, and inflation," European Economic Review, Elsevier, vol. 34(5), pages 897-911, July.
    5. Eliana Cardoso, 1992. "Inflation and Poverty," NBER Working Papers 4006, National Bureau of Economic Research, Inc.
    6. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
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    Cited by:

    1. Sofyan SYAHNUR & Klaus FROHBERG, "undated". "The Impact of Oil Price Behavior on the Poor in Nanggroe Aceh Darussalam Province, Indonesia," EcoMod2008 23800139, EcoMod.

    More about this item

    Keywords

    Economic models; Real wages; Poverty; Inflation; Wages; Heckscher-Ohlin; cash-in-advance; high inflation; relative price; relative prices; Financial Markets and the Macroeconomy;

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