The Specification of Lagged Inflation in the Wage Phillips Curve

In new Keynesian models of wage setting, wage inflation is generally assumed to depend on one lagged value of price inflation. In addition, in purely backward-looking wage Phillips curves, wage inflation is generally assumed to depend on several lagged values of price inflation. This study demonstrates both that current wage inflation is more closely related to lagged wage inflation than to lagged price inflation and that specifications with multiple lags of inflation outperform specifications with only one lag of inflation. Thus, wage inflation can be predicted more accurately by a model that includes multiple lags of wage inflation as independent variables.