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Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission

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  • Frederick Van Der Ploeg
  • Tim Willems

Abstract

Since the post-Covid rise in inflation has been accompanied by strong wage growth, the distributional conflict between wage- and price-setters (both wishing to attain a certain markup) has regained prominence. We examine how a central bank should resolve a “battle of the markups” when aspired markups are cyclically sensitive, highlighting a new “aspirational channel” of monetary transmission. We establish conditions under which an inflationary situation characterized by inconsistent aspirations requires a reduction in economic activity, to eliminate worker-firm disagreement over the appropriate level of the real wage. We find that countercyclical markups and/or a flat Phillips curve call for more dovish monetary policy. Estimating price markup cyclicality across 61 countries, we find evidence for countercyclicality in most of them.

Suggested Citation

  • Frederick Van Der Ploeg & Tim Willems, 2025. "Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission," Economics Series Working Papers 1074, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:1074
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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