Wage Indexation and Macroeconomic Stability : The Gray-Fischer Theorem Revisted

Author/Editor:

Esteban Jadresic

Publication Date:

November 1, 1996

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

Summary:

Since the seminal papers by Gray (1976) and Fischer (1977) were published, the major theorem of the wage indexation literature has been that indexing wages stabilizes output when shocks are nominal and destabilizes output when shocks are real. This paper reexamines the validity of this proposition taking into account the lags in actual indexation practices in an economy similar to that originally considered by those authors. It shows that in such a setup, wage contracts indexed to lagged inflation tend to destabilize output regardless of whether shocks are nominal or real.

Series:

Working Paper No. 96/121

English

Publication Date:

November 1, 1996

ISBN/ISSN:

9781451854336/1018-5941

Stock No:

WPIEA1211996

Format:

Paper

Pages:

24

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