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Frederick VAN DER PLOEG (University of Oxford) “Battle of the Markups : Conflict Inflation and the Aspirational Channel of Monetary Policy Transmission”

April 25 @ 11:30 am - 12:30 pm

Quantitative Sustainable Economics and Finance 
Time: 11.30 am
Date: 25th of April  2024
Room 3001

Frederick VAN DER PLOEG (University of Oxford) “Battle of the Markups : Conflict Inflation and the Aspirational Channel of Monetary Policy Transmission”

Abstract : After the post-Covid rise in inflation, a debate has emerged whether this inflation is “seller-driven” and, if so, how policy should respond. We build a model to capture the underlying distributional conflict between wage- and price-setters both wishing to attain a certain markup. We highlight a new “aspirational channel” of monetary transmission: by influencing cyclical conditions, a central bank can control inflation through affecting markup aspirations of workers and firms. We establish conditions under which an inflationary situation characterized by inconsistent aspirations requires a reduction in economic activity, to push demands of workers and firms towards consistency. We find that countercyclical markups and/or a flat Phillips curve call for more “dovish” monetary policy (responding less to inflation deviations, more to the output gap). Estimating price markup cyclicality across 43 countries, we find that contractionary monetary shocks indeed have stronger anti-inflationary effects in countries with greater markup procyclicality

Organizers:

Peter TANKOV (CREST)

Sponsors:
CREST