Working Paper: NBER ID: w1771
Authors: Olivier J. Blanchard
Abstract: This paper rehabilitates the old wage price spiral. It shows that, after an increase in aggregate demand, the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages. Under continuous price and wage setting, the process of adjustment would be instantaneous ; under staggering of price and wage decisions, the adjustment takes time. The more inflexible real wages and markups are to shifts in demand, the higher is the degree of price level inertia, the longer lasting are the effects of aggregate demand on output.
Keywords: Wage-Price Spiral; Aggregate Demand; Price Level Inertia; Monopolistic Competition
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aggregate Demand (E00) | Nominal Wages (J31) |
| Aggregate Demand (E00) | Nominal Prices (P22) |
| Inflexibility of Real Wages and Markups (F16) | Price Level Inertia (E31) |
| Price Level Inertia (E31) | Prolonged Effects on Output (E23) |
| Aggregate Demand (E00) | Output (Y10) |
| Inflexibility of Real Wages and Markups (F16) | Prolonged Effects on Output (E23) |