High Inflation and Real Wages

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.
Publication date: May 2001
ISBN: 9781451846973
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Inflation , Inflation , Heckscher-Ohlin , cash-in-advance , high inflation , relative price , relative prices , Financial Markets and the Macroeconomy

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