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Wage-Price Spirals: A Risk-Based Approach

Author

Listed:
  • Michal Franta
  • Jan Vlcek

Abstract

The discussion about wage-price spirals has revived recently due to the wave of elevated inflation. We propose a framework based on quantile regression to assess the risk of simultaneous rapid growth in wages and prices. We show that for the UK and US, the risk of such growth in wages and prices coincides with the risk of their heightened persistence or even acceleration. The materialization of the risk then defines the occurrence of a wage-price spiral. The proposed framework allows us to identify forthcoming episodes of elevated wage-price spiral risk and episodes of its materialization. Moreover, we show that the risk of a wage-price spiral varies with the usual business cycle factors and monetary policy. Based on the outcomes, we suggest general lessons for policymakers. Finally, the framework is also applied to the Czech Republic to show its usefulness and properties in the case of short time series.

Suggested Citation

  • Michal Franta & Jan Vlcek, 2024. "Wage-Price Spirals: A Risk-Based Approach," Working Papers 2024/1, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2024/1
    as

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    References listed on IDEAS

    as
    1. Victor Chernozhukov & Iván Fernández-Val, 2011. "Inference for Extremal Conditional Quantile Models, with an Application to Market and Birthweight Risks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(2), pages 559-589.
    2. Mr. Jorge A Alvarez & Mr. John C Bluedorn & Mr. Niels-Jakob H Hansen & Youyou Huang & Evgenia Pugacheva & Alexandre Sollaci, 2022. "Wage-Price Spirals: What is the Historical Evidence?," IMF Working Papers 2022/221, International Monetary Fund.
    3. Francesco Bianchi, 2013. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 463-490.
    4. Victor Chernozhukov, 2005. "Extremal quantile regression," Papers math/0505639, arXiv.org.
    5. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    6. Ms. Magda E. Kandil, 2003. "The Wage-Price Spiral: Industrial Country Evidence and Implications," IMF Working Papers 2003/164, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation; inflation and wage growth at risk; quantile regression; wage-price spiral;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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