Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299349 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-14
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Elevated inflation can threaten the credibility of central banks and increase the risk that inflation expectations do not remain anchored. Wage-price spirals might develop in such an environment, and high inflation could become entrenched. We quantitively assess the risks of a wage-price spiral occurring in Canada over history by using a medium-scale dynamic stochastic general equilibrium model enhanced with heterogenous expectation and learning. This mechanism generates time-varying propagation of inflationary shocks that improves forecasting performance of inflation and wage growth. Central bank credibility is endogenous in our model and depends on several notions of the learning mechanism. Weaker credibility and a higher risk of inflation expectations not remaining anchored increase the risk of a wage-price spiral.
Subjects: 
Business fluctuations and cycles
Credibility
Inflation and prices
Monetary policy
JEL: 
E00
E7
E47
C22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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