New Keynesian aggregate supply in the tropics: food prices, wages and inflation
by Ashima Goyal; Shruti Tripathi
International Journal of Monetary Economics and Finance (IJMEF), Vol. 4, No. 4, 2011

Abstract: Since consumer prices are a weighted average of domestic and imported goods prices, domestic Price Inflation (WPII) should cause Consumer Price Inflation (CPII). But at low per capita incomes average wages respond to food prices, raising costs and hence domestic prices. Then CPII, for which food is the dominant component, should Granger cause WPII. This reverse causality is derived and finds support in an estimated new Keynesian Aggregate Supply (AS) framework with the wage-price link. The AS and the identity both hold as long-run cointegrating relationships. The AS is elastic but food prices and the exchange rate are important for inflation.

Online publication date: Thu, 27-Oct-2011

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