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Indexation, Contract Length, and the Cost of Disinflation in Economies with Extreme Inflation

Karsten Staehr ()

No 95-13, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper examines the real cost of disinflation in an economy with high and uncertain inflation. The private sector writes contracts in which wages are indexed to a lagged price index and the exchange rate ("dollarization"). Contracts of fixed and endogenously determined lengths are considered. The real costs of disinflation depend on the initial conditions and on the credibility of stabilization. The higher and more uncertain the initial inflation is, the lower the sacrifice ratio is.

Date: 1995-07
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