Battle of the markups: conflict inflation and the aspirational channel of monetary policy transmission

Working paper

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 characterized 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

Authors: Van Der Ploeg, F; Willems, T

• Publication status: Published
• Peer review status: Reviewed (other)
• Publisher: Department of Econmics, University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford, UK
• Publication date: 2025-03-27
• ISSN: 1471-0498
• Paper number: 1074
• Language: English
• Keywords: inflation; monetary policy transmission; wage-price dynamics; Taylor principle; markups; determinacy