Working Paper: CEPR ID: DP18142
Authors: Oscar Jorda; Fernanda Nechio
Abstract: Following the worst of the COVID-19 pandemic, inflation surged to levels last seen in the 1980s. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and its feedback to wages. We exploit the differences in pandemic support to identify the effect that these programs had on inflation and the passthrough to wages. Our empirical approach focuses on a novel dynamic difference-in-differences method based on local projections. Our estimates suggest that an increase of 5 percentage points in direct transfers (relative to trend) translates into about a peak 3 percentage points boost to inflation and wage growth. Moreover, higher inflation accentuates the role of inflation expectations on wage-setting dynamics.
Keywords: Local Projections; Difference-in-Difference Estimator; Inflation; Wages; Direct Fiscal Transfers; COVID-19 Pandemic
JEL Codes: E01; E30; E32; E44; E47; E51; F33; F42; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Direct fiscal transfers (H87) | Inflation (E31) |
| Direct fiscal transfers (H87) | Wage growth (J31) |
| Increase in real disposable income (D12) | Price inflation (E31) |
| Increase in real disposable income (D12) | Wage inflation (J31) |
| Inflation expectations (E31) | Wage inflation (J31) |
| Fiscal support (E62) | Inflation dynamics (E31) |
| Fiscal support (E62) | Wage dynamics (J31) |