Money, Wages and Inflation in Middle-Income Developing Countries
38 Pages Posted: 15 Feb 2006
Date Written: December 1997
This paper examines the short-run links between money growth, exchange rate depreciation, nominal wage growth, the output gap, and inflation in Chile, Korea, Mexico, and Turkey, using a generalized vector autoregression analysis. Nominal historical wage shocks are shown to have an important effect on movements in inflation only in Mexico. Generalized impulse response functions show that a positive historical shock to nominal wage growth generates a transitory but significant reduction in output. Inflation increases in all countries, particularly Mexico. A positive shock to nominal money growth raises real cash balances on impact and exerts an expansionary effect on output, despite an increase in real wages.
Keywords: Determinants of inflation, generalized VAR analysis
JEL Classification: E24, E31, F31
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