THE WAGE GROWTH AND INFLATION NEXUS IN A DYNAMIC MULTIVARIATE CONTEXT: NEW EVIDENCE FROM GREECE

George Hondroyiannis

International Economic Journal, 2001, vol. 17, issue 1, 121-138

Abstract: Different macroeconomic schools of thought have provided different explanations for the relationship between the price level and wage level. This paper investigates the linkages between price level and wage level employing quarterly data in Greece over the period 1980-98. To account for influences on the bivariate relationship of monetary and exchange rate policies, money supply and exchange rate were added to the model. In the empirical analysis the Johansen maximum likelihood technique is applied to search for a long-run relationship among the macroeconomic variables. The application of vector error-correction models is used to investigate the response of inflation and wage inflation to monetary and exchange rate policies aiming at testing the sources of price-wage variations. The estimation results employing the vector error-correction models indicate that a unidirectional causality exists from wages to price level. In addition, the results indicate that inflation in the long run is determined by changes in money supply and exchange rate. The results imply that since wages have an impact on price level, wage inflation can be used as monetary policy information variable. [C22, Å31]

Date: 2001
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DOI: 10.1080/10168730300080008

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