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

Pau Rabanal and M. Belen Sbrancia

No 2024/105, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Wage Setting; Inflation Persistence; Monetary Policy; monetary policy transmission mechanism; wage inflation; extent wage growth dynamics; medium-scale DSGE model; indexation practice; Inflation; Wages; Wage indexation; Inflation targeting; Global (search for similar items in EconPapers)
Pages: 34
Date: 2024-05-24
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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