THE DECLINE IN OIL PRICE PASS-THROUGH TO WAGE INFLATION IN 11 EUROPEAN COUNTRIES

Kyle A. Kelly, Yanan Chen

Abstract


A structural break is found on oil price coefficients in wage Phillips curves for 11 European nations that matches the timing found elsewhere. Oil prices fed directly into wage inflation in during the 1960s and 1970s, but had no effect afterwards. The authors develop a model that shows when inflation expectations become unanchored, oil price shocks cause large and persistent increases in wage inflation. These shocks die out when inflation expectations become better anchored.

Keywords: wage inflation, oil price pass-through, anchored expectations, and structural break.

JEL codes: E31, E24, E50


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References


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