High Inflation and Real Wages

Benedikt Braumann

No 2001/050, IMF Working Papers from International Monetary Fund

Abstract: Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.

Keywords: WP; consumer goods; excess supply; Inflation; real wages; poverty; Heckscher-Ohlin; cash-in-advance; inflation crisis; inflation increase; factor price; investment goods; price effect; inflation broken line; Consumption (search for similar items in EconPapers)
Pages: 24
Date: 2001-05-01
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Citations: View citations in EconPapers (4)

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