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The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs
Author:
Mr. Joe Crowley
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Series:
IMF Working Papers
Volume/Issue:
Volume 1997: Issue 038
Language:
English
Publication Date:
01 Apr 1997
DOI:
https://doi.org/10.5089/9781451845655.001
ISBN:
9781451845655
ISSN:
1018-5941
Pages:
34
Keywords:
WP; backward-looking indexation; stabilization program; forward-looking indexation; wage growth; indexed wage; current account growth; wage rule; disequilibrium real wage level; real wage stability; backward-looking wage indexation; wage indexation structures; Wage indexation; Inflation; Real wages; Wages; Price stabilization
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund