The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs
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Summary:
A standard open-economy model is used to show that price stabilization programs are more likely to succeed if labor contracts specify forward-looking wage indexation. Compared with contracts specifying backward-looking wage indexation or wages based on static expectations, such contracts will result in a greater reduction in inflation with lower output costs, smaller misalignment of real wages, smaller outflows of reserves, smaller disruptions caused by policy announcements, and a reduced impact of some shocks during price stabilization programs. These results are generally true whether or not capital is mobile and whether or not expectations are rational.
Series:
Working Paper No. 1997/038
Subject:
Exchange rates Inflation Labor Price stabilization Prices Real wages Wage indexation Wages
English
Publication Date:
April 1, 1997
ISBN/ISSN:
9781451845655/1018-5941
Stock No:
WPIEA0381997
Pages:
34
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