Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission

Frederick (Rick) van der Ploeg and Tim Willems ()
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Tim Willems: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1065, Bank of England working papers from Bank of England

Abstract: Since the post‑Covid rise in inflation has been accompanied by strong wage growth, the distributional conflict between wage and price‑setters (both wishing to attain a certain markup) has regained prominence. We examine how a central bank should resolve a ‘battle of the markups’ when aspired markups are cyclically sensitive, highlighting a new ‘aspirational channel’ of monetary transmission. We establish conditions under which an inflationary situation characterised by inconsistent aspirations requires a reduction in economic activity, to eliminate worker‑firm disagreement over the appropriate level of the real wage. We find that countercyclical markups and/or a flat Phillips curve call for more dovish monetary policy. Estimating price markup cyclicality across 44 countries, we find that monetary contractions are better able to lower inflation when markups are procyclical.

Keywords: Inflation; wage-price dynamics; markups; monetary policy transmission; Taylor principle; determinacy (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2024-03-08
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Working Paper: Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission (2023)
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