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Wages and prices in the euro area: exploring the nexus

Antonio Conti () and Andrea Nobili ()

No 518, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We investigate the structural relationship between wages dynamics and core inflation in the euro area using Bayesian VAR models. We find that the pass-through from wages to consumer prices net of food and energy is less than unity and depends on the nature of the shocks hitting the economy. A monetary policy shock implies a positive co-movement between these variables, which is similar in magnitude to that stemming from an aggregate demand shock. Financial shocks, as captured by credit spreads and indicators of systemic stress, are instead associated with a negative co-movement between wages and prices and generate firms’ countercyclical mark-ups, consistently with recent models featuring financial frictions and nominal rigidities. These findings may explain why the recent pick-up in wages is not associated with a sustained path of core inflation in the euro area.

Keywords: wage-price pass-through; countercyclical mark-ups; financial shocks; Bayesian VAR (search for similar items in EconPapers)
JEL-codes: E30 E32 E51 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_518_19

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