How are wage developments passed through to prices in the euro area? Evidence from a BVAR model

Understanding Low Wage Growth in the Euro Area and European Countries

“…Besides these qualitative differences in the pass-through of the two types of shocks on prices, Chart A and Chart B also highlight that the impact on prices of a demand shock that lifts compensation per employee growth by a certain magnitude appears to be larger than the impact of a supply shock that entails the same impact on compensation per employee growth. Similar results to those of the ECB New Area-Wide Model have been obtained from a BVAR model for the wage-price pass-through in the euro area (see Hahn, 2018). Notes: The x-axis indicates the quarters following the shock.…”

The Phillips Curve at the ECB

“…Recent work by ECB staff has deepened the analysis of the hypothesis that wage-price 'passthrough' is state-dependent. These studies find that the impact of wage inflation on price inflation depends on the source of the shocks driving the economy at each point of time: wage increases pass through to inflation faster and to a larger extent following a demand shock than a supply shock (Bobeica, Ciccarelli, & Vansteenkiste, 2019;Gumiel & Hahn, 2018;Hahn, 2019). 42 Conti and Nobili (2019) also find that the pass-through of wages to prices depends on the nature of the shock hitting the economy.…”

The Wage-Price Pass-Through in the Euro Area: Does the Growth Regime Matter?

“…and Deutsche Bundesbank (2019)). Gumiel and Hahn (2018) suggest that wages and prices are connected via different transmission channels concurrently and show that the wage-price pass-through is shock dependent which was confirmed in empirical analyses (see Hahn (2019) and ). The identified shock-dependence together with changes in the composition of the shocks over time creates a non-linear relationship and likely changes in the link between wages and prices over time which may have contributed to the inflation puzzles identified based on linear models.…”

“…A number of studies hint at changes in the relationship over time (see e.g. Deutsche Bundesbank ECB Working Paper Series No 2485 / October 2020 (2019) and de Luigi ( 2019)) and such changes were detected even when controlling for shockdependence (Hahn (2019)). This suggests that there may have been also more profound structural changes in the relationship over time or likewise a dependence of the relationship on certain states of the economy as has been suggested recently with regard to e.g.…”

“…The present paper analyses the state-dependence of the wage-price pass-through in the euro area with regard to the growth regime by applying the Threshold VAR (TVAR) model proposed by Alessandri and Mumtaz (2017). As in Hahn (2019) demand and wage mark-up shocks are identified. The TVAR model then allows analysing the wage-price pass-through of these types of shocks for different levels of GDP growth, i.e.…”