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Wage Indexation, Inflation Inertia, and the Cost of Disinflation

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  • Javier Gómez.

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    Abstract

    What are the consequences of wage negotiations on monetary policy in acountry that is in transition to lower inflation? We show that wageindexation to expected inflation, increased central bank credibility and ahigher frequency of wage adjustments can increase the effect of monetarypolicy and can decrease the cost of disinflation. Important welfare gainscan be obtained with the best possible performance in the pursuit ofinflation targets and with the highest possible precision in inflationforecasts since these actions increase central bank credibility. Wage policieslike the one proposed by the Colombian Constitutional Court can haveimportant negative consequences on output and real wages.

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    File URL: http://www.banrep.gov.co/docum/ensayos/pdf/espe_043-3.pdf
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    Bibliographic Info

    Article provided by BANCO DE LA REPÚBLICA - ESPE in its journal ENSAYOS SOBRE POLÍTICA ECONÓMICA.

    Volume (Year): (2003)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000107:005297

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    Keywords: wage indexation; disinflation; sacrifice ratio; staggered wage contracts; credibility.;

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