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Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation

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  • Fischer, Stanley
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    Abstract

    This paper shows first that real exchange-rate appreciation typically reduces, but may increase, the output cos ts of disinflation. The direct favorable effects of cheaper imports o n consumer prices, on the prices of imported inputs, on wage demands, and on the demand for money may be outweighed by the unemployment ca used by the trade deficit. Second, the effects of wage indexation on the costs of disinflation are reexamined. Ex ante indexation speeds u p disinflation. Ex post indexation, the type observed in practice, au tomatically increases the real wage at the start of a disinflation an d may therefore increase the sacrifice ratio. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal Quarterly Journal of Economics.

    Volume (Year): 103 (1988)
    Issue (Month): 1 (February)
    Pages: 27-49

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    Handle: RePEc:tpr:qjecon:v:103:y:1988:i:1:p:27-49

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    Cited by:
    1. Milesi-Ferretti, Gian Maria, 1995. "A simple model of disinflation and the optimality of doing nothing," European Economic Review, Elsevier, vol. 39(7), pages 1385-1404, August.
    2. Federico Echenique & Alvaro Forteza, 1996. "Are stabilization programs expansionary?," Documentos de Trabajo (working papers) 0196, Department of Economics - dECON.
    3. Jeffrey A. Frankel, 2010. "Monetary Policy in Emerging Markets: A Survey," NBER Working Papers 16125, National Bureau of Economic Research, Inc.
    4. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc.
    5. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," IMF Working Papers 98/15, International Monetary Fund.
    6. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    7. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    8. Corbo, Vittorio & Solimano, Andres, 1991. "Chile's experience with stabilization, revisited," Policy Research Working Paper Series 579, The World Bank.
    9. Vittorio Corbo & Stanley Fischer, . "Lessons from the Chilean Stabilization and Recovery," Documentos de Trabajo 158, Instituto de Economia. Pontificia Universidad Católica de Chile..
    10. Hofstetter, Marc, 2008. "Disinflations in Latin America and the Caribbean: A free lunch?," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 327-345, March.
    11. Marek Dabrowski, 2002. "Currency Crises in Emerging - Market Economis: Causes, Consequences and Policy Lessons," CASE Network Reports 0051, CASE-Center for Social and Economic Research.
    12. Vegh, Carlos, 1991. "Stopping High Inflation: An Analytical Overview," MPRA Paper 20175, University Library of Munich, Germany.
    13. Usman A. Afridi & Rehana Siddiqui, 1994. "Framework for Deriving Real Exchange Rates," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 33(4), pages 1099-1112.
    14. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
    15. Vittorio Corbo, . "Reducing Inflation. The Chilean Experience," Documentos de Trabajo 185, Instituto de Economia. Pontificia Universidad Católica de Chile..
    16. M. Ali Choudhary & Saima Mahmood & Sajawal Khan & Waqas Ahmed & Gylfi Zoega, 2013. "Sticky Wages in a Developing Country: Lessons from Structured Interviews in Pakistan," School of Economics Discussion Papers 0213, School of Economics, University of Surrey.
    17. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.

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