The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs

Joe Crowley

No 1997/038, IMF Working Papers from International Monetary Fund

Abstract: 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.

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 (search for similar items in EconPapers)
Pages: 34
Date: 1997-04-01
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Citations: View citations in EconPapers (2)

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