The inflation loop is not a myth

Abstract

This paper is part of the current debate around the wage-price spiral as inflation surges rapidly, and it assesses empirically whether the prevalence of wage indexation arrangements and the balance of bargaining power between workers and firms can explain cross-country differences in the dynamics of the inflation spiral. To this end, we estimate an IPVAR model on a sample of 37 OECD and non-OECD economies over the period 1960Q1–2019Q4. The results indicate that wage indexation, trade union density, wage bargaining coverage and a high degree of coordination in the wage-setting process exacerbate the persistence of inflation following an initial price shock. Our findings then suggest that central banks should take the institutional features of the labour market and wage bargaining into consideration in the conduct of their monetary policy.