High Inflation and Real Wages, Issues 2001-2050
International Monetary Fund, Western Hemisphere Department, May 1, 2001 - Business & Economics - 23 pages
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.
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aggregate demand Argentina Brazil capital accumulation capital intensive cash-in-advance constraint consumer and investment decline in real demarcation line ECLAC effects on real empirical patterns equation Euler equation factor prices factor supplies fall in real Heckscher-Ohlin model high inflation episodes households hyperinflation increase in inflation increasing poverty inflation crises inflation increases inflation rate inflation right scale inflationary intertemporal labor demand labor intensive macro variables market-oriented reforms model yields monetary Money growth money illusion money is introduced negative effect non-tradables numeraire percent Perfect competition Permanent Increase phase diagram poor left scale poverty line price of labor proxy real exchange rate Real interest rate real wages fall redistribution of income relative price effect Rybczynsky theorem sectors of production sharp decline shift stabilization Stolper-Samuelson theorem stylized facts t+1 t+2 t+3 t+2 t+3 t+4 t+3 t+4 t+5 t+4 t+5 t+6 temporary increase trajectories transformation curve two-sector economy wages during high wealth effects