Staff Working Paper No. 1,065
By Frederick van der Ploeg and Tim Willems
Since the post-Covid rise in inflation has been accompanied by strong wage growth, the distributional conflict between wage and price-setters (both wishing to attain a certain markup) has regained prominence. We examine how a central bank should resolve a ‘battle of the markups’ when aspired markups are cyclically sensitive, highlighting a new ‘aspirational channel, of monetary transmission. We establish conditions under which an inflationary situation characterised by inconsistent aspirations requires a reduction in economic activity, to eliminate worker-firm disagreement over the appropriate level of the real wage. We find that countercyclical markups and/or a flat Phillips curve call for more dovish monetary policy. Estimating price markup cyclicality across 61 countries, we find evidence for countercyclicality in most of them.
This version was updated in June 2024.
Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission