Does wage inflation cause price inflation in Zimbabwe(1970-2008)

Abstract

There has been much debate in literature on the direction of causality between price inflation and wage inflation. The Johansen procedure suggests that wage growth and price inflation are cointegration. Variables used in this study are real interest rates, money supply growth, real wages, productivity, real exchange rate and price inflation. This study employs an Error Correction Model (ECM) together with the Granger causality test to examine the causal relationship which is presumed to exist between these two variables. The empirical findings of the study show that (i) there is a long run relationship between price inflation and wage growth and (ii) there is bidirectional causality between inflation and wage growth. This shows that there is both cost push and demand pull inflation in Zimbabwe. Results