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Signalling, Wage Controls and Monetary Disinflation Policy

  • Torsten Persson
  • Sweder van Wijnbergen

Wage and price controls have a long and somewhat disreputable history, presumably because of their frequent use in many countries as short run substitutes for measure~ with more lasting effects on the inflation rate. But, in 1985 and 1986, Argentina, Brazil, and Israel used extensive wage-price controls as part of more comprehensive disinflation programs, .often labeled "heterodox" stabilization programs. To date, the Israeli stabilization seems to have succeeded, while the Argentinean and Brazilian stabi1izations have clearly ended in failure. This experience raises many questions. One view is that controlling one nominal variable, namely the money supply, is enough to bring down inflation provided that sound fiscal policies are also adopted. Therefore, wage and price controls should be avoided, because of their microeconomic costs. It is clear that controls do have microeconomic costs, but can they also have macroeconomic benefits? Under which circumstances do controls help in bringing down inflation, and when do they just suppress it temporarily? What is the required supporting role of fiscal and monetary policy while they are in place? These are the issues addressed in this paper.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2939.

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Date of creation: Apr 1989
Date of revision:
Publication status: published as Economic Journal, Vol. 103 (1993): 79-97.
Handle: RePEc:nbr:nberwo:2939
Note: EFG ITI IFM
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  1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  2. Dani Rodrik, 1988. "Promises, Promises: Credible Policy Reform via Signaling," NBER Working Papers 2600, National Bureau of Economic Research, Inc.
  3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  4. Elhanan Helpman, 1987. "Macroeconomic Effects of Price Controls: The Role of Market Structure," NBER Working Papers 2434, National Bureau of Economic Research, Inc.
  5. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  6. Persson, Torsten, 1988. "An introduction and a broad survey," European Economic Review, Elsevier, vol. 32(2-3), pages 519-532, March.
  7. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
  8. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 211-21, April.
  9. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
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