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The post-crisis Phillips Curve and its policy implications: cumulative wage gap matters for inflation

Author(s): Liviu Voinea

Date published: May 2019

SUERF Policy Note, Issue No 69
By Liviu Voinea, National Bank of Romania


JEL-codes: E21, E24, E3.
Keywords: Wage, cumulative wage gap, inflation, Phillips Curve, monetary policy.

We introduce the concept of cumulative wage gap – meaning the cumulative gap between the current wage and a peak reference wage value in the past. After a crisis, people relate to their peak gains in the past rather than to uncertain future gains. The shape of the post-crisis Phillips Curve expresses the theoretical assumption that the inflation rate stays below its target until the cumulative real wage gap closes, and that it increases above its target when the cumulative real wage gap becomes positive. We confirm our hypothesis using data for 35 OECD countries for the period 1990-2017. Inflation depends on the cumulative wage gap: it does not increase close to or above its target level until the cumulative real wage gap is closed. For Phillips Curve to work, the loss of welfare from a negative cumulative real wage gap has to be fully compensated first – as a stock measure, not as a flow.

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