Examining Price-Wage Dynamics in a Small Open Economy: The Case of Uruguay
IMF Working Papers, May 24, 2024
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- Examining Price-Wage Dynamics in a Small Open Economy: The Case of Uruguay
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Bibliographic details
- Authors: Pau Rabanal, M. Belen Sbrancia
- Published: May 24, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400275432.001
Research question and context
- Recent global increases in inflation have renewed interest in the link between inflation and wages.
- In Uruguay, centralized wage bargaining and indexation practices raise the question: to what extent can wage growth dynamics make the response of inflation to shocks more persistent?
Methodology
- A medium-scale DSGE model is used.
- The model incorporates indexation in the wage setting equation to analyze interactions between wage setting behavior and other macroeconomic variables, and to assess the role of monetary policy.
Key findings
- Wage indexation increases the persistence of the response of inflation to domestic and foreign shocks.
- Wage indexation affects the monetary policy transmission mechanism.
- Wage indexation affects the severity of the trade-offs faced by the central bank.
Policy implications and interpretation
- The presence of wage indexation and centralized wage bargaining can make inflation responses more persistent, which has implications for inflation stabilization strategies.
- Monetary policy transmission and the nature of central bank trade-offs are altered by wage-setting dynamics, implying a need for monetary policy frameworks to account for indexation practices in small open economies like Uruguay.
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