Modelling Wages and Prices in Australia
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This paper estimates a simultaneous-equation model of wages and prices for Australia, underpinned by a competing claims framework of imperfect competition. Two separate cointegrating relationships for wages and prices are identified by imposing the economic hypotheses implied by the theory. The steady-state relationships for wages and prices are then embedded in a parsimonious, dynamic wage-price model. The final model is both simple and parsimonious and able to describe the process of wage and price inflation in Australia.