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The relationship between inflation and wage growth in the Irish economy

Author

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  • Stilianos Fountas
  • Breda Lally
  • Jyh-Lin Wu

Abstract

This paper tests for the long-run and short-run relationship between prices and wages in the Irish economy over the 1975-92 period. Using recent econometric techniques in the analysis of time series, we conclude that there is a long-run equilibrium relationship between prices, wages and an excess demand variable in agreement with the expectations augmented Phillips curve theory of inflation. Making use of error-correction equations in order to study the short-run dynamics, we find that the long-run relationship between prices and wages is due to Granger causality running from wage inflation to price inflation. In addition, the predictive ability of excess demand is weak with respect to wage inflation but very strong with respect to price inflation. These results imply (a) relatively strong evidence in favour of a mark-up price equation consistent with the expectations augmented Phillips curve theory of inflation, and (b), very weak evidence for the predictive power of past inflation and the output gap for wages, i.e., a wage-type Phillips curve effect. In other words, the results provide strong support for the claim that inflation in Ireland has cost-push elements and very weak support for the existence of demand-pull elements.

Suggested Citation

  • Stilianos Fountas & Breda Lally & Jyh-Lin Wu, 1999. "The relationship between inflation and wage growth in the Irish economy," Applied Economics Letters, Taylor & Francis Journals, vol. 6(5), pages 317-321.
    • Handle: RePEc:taf:apeclt:v:6:y:1999:i:5:p:317-321
    DOI: 10.1080/135048599353311
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    Cited by:

    1. Saten Kumar & Don J. Webber & Geoff Perry, 2012. "Real wages, inflation and labour productivity in Australia," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 2945-2954, August.
    2. Zungun Deniz & Ayvaz Guven Emine Turkan, 2015. "The Footprints Of Stagflation In Turkish Economy," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 46-60, December.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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