Abstract
This paper presents an empirical framework and analysis of the interactions among inflation, wages, employment, and out put in the euro area. Results identify price shocks and demand shocks as the primary exogenous factors explaining historical variance. The wage gap emerges as a key determinant of wage dynamics in the aftermath of a price shock. In contrast, the output gap becomes dominant following demand shocks. The real wage gap acts as a corrective mechanism, ensuring that prices and wages in particular align with the broader economic landscape. Forecasts for the period starting 2023:Q4 emphasize the enduring significance of the real wage gap, projecting its ongoing impact on nominal wages in tight labor markets. As for inflation expectations, the estimates emphasize their stickiness. In this context, the significant and persistent price shock that has occurred suggests a gradual decline in expectations, potentially leading to an extended period of elevated inflation.
Authors
- Vahagn Galstyan
JEL codes
- E00
- E12
- E30
- E31
- E32