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Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

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Richard C. Marston
Abstract

This 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1046.

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Date of creation: Oct 1984
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Handle: RePEc:nbr:nberwo:1046

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April. [Downloadable!] (restricted)
  2. Richard C. Marston, 1982. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Flood, Robert P & Marion, Nancy Peregrim, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 43-66, February. [Downloadable!] (restricted)
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  1. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  2. Lucy Rees & Rod Tyers, 2004. "On the Robustness of Short Run Gains from Trade Reform," CEPR Discussion Papers 474, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
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