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High Inflation and Real Wages

  • Benedikt Braumann
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    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.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=4067
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/50.

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    Length: 24
    Date of creation: 01 May 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/50
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    1. Eliana Cardoso, 1992. "Inflation and Poverty," NBER Working Papers 4006, National Bureau of Economic Research, Inc.
    2. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
    3. Helpman, Elhanan & Leiderman, Leonardo, 1990. "Real wages, monetary accommodation, and inflation," European Economic Review, Elsevier, vol. 34(5), pages 897-911, July.
    4. Benedikt Braumann, 2000. "Real Effects of High Inflation," IMF Working Papers 00/85, International Monetary Fund.
    5. 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.
    6. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
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