High Inflation and Real Wages

Braumann, Benedikt

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High Inflation and Real Wages

IMF Working Paper No. 01/50

24 Pages Posted: 11 Aug 2009

See all articles by Benedikt Braumann

Benedikt Braumann

International Monetary Fund (IMF) - Western Hemisphere Department

There are 2 versions of this paper

Date Written: May 2001

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: Inflation, Wages, Poverty, Economic models

Suggested Citation: Suggested Citation

Braumann, Benedikt, High Inflation and Real Wages (May 2001). IMF Working Paper No. 01/50, Available at SSRN: https://ssrn.com/abstract=1445784