Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation
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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Volume (Year): 103 (1988)
Issue (Month): 1 (February)
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