The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs


Joe Crowley

Publication Date:

April 1, 1997

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate


A standard open-economy model is used to show that price stabilization programs are more likely to succeed if labor contracts specify forward-looking wage indexation. Compared with contracts specifying backward-looking wage indexation or wages based on static expectations, such contracts will result in a greater reduction in inflation with lower output costs, smaller misalignment of real wages, smaller outflows of reserves, smaller disruptions caused by policy announcements, and a reduced impact of some shocks during price stabilization programs. These results are generally true whether or not capital is mobile and whether or not expectations are rational.


Working Paper No. 1997/038



Publication Date:

April 1, 1997



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