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Wage and price formation in a small open economy : evidence from Iceland

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Titill: Wage and price formation in a small open economy : evidence from IcelandWage and price formation in a small open economy : evidence from Iceland
Höfundur: Þórarinn Gunnar Pétursson 1966
URI: http://hdl.handle.net/10802/4752
Útgefandi: Central Bank of Iceland, Economics Department
Útgáfa: 03.2002
Ritröð: Central Bank of Iceland., Working papers ; 16
Efnisorð: Efnahagsmál; Líkön; Reiknilíkön; Verðmyndun; Kjaramál; Skýrslur; Ísland
ISSN: 1028-9445
Tungumál: Enska
Tengd vefsíðuslóð: http://www.sedlabanki.is/uploads/files/wp-16.pdf
Tegund: Skýrsla
Gegnir ID: 000430691
Athugasemdir: Myndefni: línurit, töflur
Útdráttur: This paper uses an open economy version of a wage-price model with imperfect competition in goods and labour markets to analyse wage and price inflation in Iceland. The model identifies three main sources of wage and price inflation in Iceland: a conflicting claims channel, a real exchange rate channel, and an excess demand channel. The model explains a large proportion of wage and price inflation during the last three decades and is remarkably stable, considering the fundamental changes in the institutional setup in Iceland during this period. There is some evidence of an upward shift in the equilibrium mark-ups in the late 1980s. The results indicate that this was due to a substantial rise in the cost of capital that reflected the move towards market determined interest rates and a shift in policy priorities towards price stability, which cumulated in a path-breaking labour market agreement in early 1990. These changes led to a downward shift in steady state inflation and an upward shift in the natural rate of unemployment.


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