Modeling of Wages and Prices Behavior: System Dynamic Approach

Abstract

The economies of almost every country in the whole word have been suffered from coronavirus pandemic consequences. The damage was especially hard for labor markets. The large magnitude of demand and production shocks that was caused by COVID-19 significantly disturbed the dynamics of output, wages and prices. The research problem addressed in this paper focuses on dynamic properties of wages and prices behavior influenced by shocks with different magnitudes and types. We apply a system dynamic approach to conduct the simulations of economic variables and investigate the possibility of their convergence to some stable path. We examine the impact of demand and production shocks on the output and prices as well as on wage and inflation behavior. It is proved that values of models parameters are crucial for existing of new steady state and convergence of economic variables. The paper determines the bifurcation points that separate different modes of transition period in moving towards or away from equilibrium. The research includes the investigation of the impact of economy’s original state and emphasizes the importance of initial point of the system for the next its dynamics after shock. The research results derived in the paper serves as a useful learning tool to develop a discussion of the policy design issues related to reduction of negative impact of severe and unanticipated disturbance like COVID-19.

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