High Inflation and Real Wages

Information about Western Hemisphere Hemisferio Occidental

Journal Issue

Volume/Issue:: 2001/50
Series:: IMF Working Papers
Author(s):: Benedikt Braumann
Publisher:: INTERNATIONAL MONETARY FUND
Published Date:: May 2001
DOI:: http://dx.doi.org/10.5089/9781451846973.001
ISBN:: 9781451846973
ISSN:: 1018-5941
Page:: 24

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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High Inflation and Real Wages