Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy
AbstractThis paper examines the desirability of wage indexation in an open economy subject to economic disturbances which change the terms of trade and raise the prices of imported goods. Two indexation rules are considered, the traditional form of indexation to the consumer price index and indexation to the price of domestic goods alone, the latter proposed as a means of limiting the influence of import prices on the economy. The effects of the rules are shown to depend upon how the terms of trade rather than import prices alone respond to disturbances, since changes in the terms of trade determine what adjustments are required in the two real wages faced by firms and labor.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1046.
Date of creation: Oct 1984
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