High Inflation and Real Wages

May 1, 2001

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Consumption, Inflation, Labor, National accounts, Poverty, Prices, Real wages

Keywords: cash-in-advance, consumer goods, Consumption, excess supply, factor price, Heckscher-Ohlin, Inflation, inflation broken line, inflation crisis, inflation increase, investment goods, poverty, price effect, real wages, WP

Pages:
24
Volume:
2001
DOI:
https://doi.org/10.5089/9781451846973.001
Issue:
050
Series:
Working Paper No. 2001/050
Stock No:
WPIEA0502001
ISBN:
9781451846973
ISSN:
1018-5941

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