Monetary Policy and the Wage Inflation-Unemployment Tradeoff

Abstract

Using newly assembled data for 18 advanced economies between 1870 and 2020, I study how monetary policy affects wage inflation and unemployment and document two key findings regarding their tradeoff. First, the wage Phillips curve displays a time-varying slope. Second, the tradeoff becomes weaker in low price inflation environments due to a more pronounced unemployment response to monetary policy. These findings lend support to the idea that monetary policy has state-dependent effects with the central banks' ability in exploring the tradeoff being impaired by a low price inflation environment.

Keywords: Phillips curve, Phillips multiplier, wage inflation, unemployment, monetary policy, economic history

JEL Classification: E24, E31, E52, N10