The Inflation Loop is Not a Myth

This paper is part of the current debate around the wage-price spiral as inflation surges rapidly, and it assesses whether the prevalence of wage indexation arrangements and the balance of bargaining power between workers and firms can explain cross-country differences in the dynamics of the inflation spiral. To this end, we estimate an IPVAR model on a sample of 37 OECD and non-OECD economies over the period 1960Q1-2019Q4. The results indicate that wage indexation, trade union density, wage bargaining coverage and a high degree of coordination in the wage-setting process exacerbate the persistence of inflation following an initial price shock