Second-Round Wage-Price Effects of Raw Material Costs: An Empirical Analysis Using a DSGE Model
September 4, 2025
Ko Adachi*1
Naoya Kato*2
Abstract
This paper empirically examines the second-round effect of raw material price increases using a DSGE model. Specifically, it explores how price increases driven by rising raw material costs spill over into wages, which then feed back into prices. The analysis focuses on Japan and Europe, which share similar structures in terms of raw material inputs. The results show that the first-round effect, which captures the pass-through of rising raw material costs to prices, is slower in Japan than in Europe. On the other hand, the second-round effect through wages is gradual but persistent in both Japan and Europe. Furthermore, during the period of high inflation since 2020, the first-round effect of higher raw material costs was the main driver of inflation in both Japan and Europe, while the second-round effect contributed to the persistence of inflation. The paper also suggests that the recent changes in wage rigidity in Japan may have strengthened the second-round effect.
- JEL classification
- E17, E31, J30
- Keywords
- Wages, Prices, Second-Round Effects, DSGE Model
The authors thank Kosuke Aoki, Ichiro Fukunaga, Ryo Jinnai, Sohei Kaihatsu, Takuji Kawamoto, Takushi Kurozumi, Kazuki Otaka, Takatoshi Sasaki, Tomohiro Sugo, and Yusuke Takahashi for their valuable comments and discussions. The views expressed in this paper are those of the authors and do not represent the official views of the Bank of Japan. Any errors are those of the authors themselves.
- *1Research and Statistics Department, Bank of Japan
E-mail : kou.adachi@boj.or.jp - *2Research and Statistics Department, Bank of Japan
E-mail : naoya.katou@boj.or.jp
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