Wage Indexation, Inflation Inertia, and the Cost of Disinflation

Javier Gómez-Pineda

Borradores de Economia from Banco de la Republica de Colombia

Abstract: A Statement of the Colombian Consitutional Court has mandated wage indexation on the basis of past inflation. A simple model with a wage price system, a real block, and an inflation targeting interest rule is calibrated to resemble price setting in the colombian economy and to analize the differing slope of the output inflation trade off for diferent specifications of wage indexation. The disinflation experiments show that backward looking indexation increases inflation inertia, decreases the effect of monetary policy, and increases the cost of disinflation. Shorter wage contracts and more frequent wage negotiations do not appear to have important effects on the cost of disinflation. Higher central bank credibility and the use of forward looking inflation expectations in wage negotiations decrease the cost of disinflation and may eventually lead to a boom.

JEL-codes: E1 E17 E27 E52 J30 (search for similar items in EconPapers)
Date: 2002-02
New Economics Papers: this item is included in nep-afr and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Wage Indexation, Inflation Inertia, and the Cost of Disinflation (2003)
Journal Article: Wage Indexation, Inflation Inertia, and the Cost of Disinflation (2003)
Journal Article: Wage Indexation, Inflation Inertia, and the Cost of Disinflation (2003)
Working Paper: Wage Indexation, Inflation Inertia, and The Cost of Disinflation (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:198

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