Recent studies on the money wages determination process in Taiwan have focused on the consumer price index as an explanatory variable. Studies on inflation on the other hand, invariably include money wages as one of its determinants.
This immediately raises an important policy question as to the direction of causation between money wages and the rate of inflation. Unfortunately, studies on this issue appear to have been largely ignored by economists, especially in the case of Taiwan.
In this paper, this issue is directly taken up. The methodology adopted follows the procedure proposed by Granger (1969) & Sims (1972). Quarterly data covering Taiwan’s manufacturing sector and its twenty sub-industries were employed in this study. The period covered was from 1959-1983.
In general, no direction of causation between the two variables considered is obvious from the various tests in this paper.
