Examining Price-Wage Dynamics in a Small Open Economy: The Case of Uruguay

May 24, 2024

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Pau Rabanal, and M. Belen Sbrancia Examining Price-Wage Dynamics in a Small Open Economy: The Case of Uruguay, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The recent increase of inflation globally has led to a renewed interest in understanding the link between inflation and wages. In Uruguay, the presence of centralized wage bargaining and indexation practices raises the question as to what extent wage growth dynamics can make the response of inflation to shocks more persistent. We use a medium-scale DSGE model which incorporates indexation in the wage setting equation to analyze the interactions between wage setting behavior and other macroeconomic variables, as well as the role of monetary policy. The analysis suggests that wage indexation increases the persistence of the response of inflation to domestic and foreign shocks, it also affects the monetary policy transmission mechanism and the severity of the trade-offs faced by the central bank.

Subject: Inflation, Inflation targeting, Labor, Monetary policy, Prices, Wage indexation, Wage setting, Wages

Keywords: Extent wage growth dynamics, Global, Indexation practice, Inflation, Inflation Persistence, Inflation targeting, Medium-scale DSGE model, Monetary Policy, Monetary policy transmission mechanism, Wage indexation, Wage inflation, Wage Setting, Wages

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/105
Stock No:

WPIEA2024105
ISBN:

9798400275432
ISSN:

1018-5941

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