Wage Indexation and Macroeconomic Stability: The Gray-Fischer Theorem Revisted
IMF Working Papers, November 1, 1996
Source details
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- Wage Indexation and Macroeconomic Stability: The Gray-Fischer Theorem Revisted
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Bibliographic details
- Authors: Esteban Jadresic
- Published: November 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451854336.001
Summary
- Since the seminal papers by Gray (1976) and Fischer (1977), 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 that 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.
Main findings and analysis
- Reexamination context:
- Focus on an economy similar to that in Gray (1976) and Fischer (1977).
- Explicit consideration of lags in actual indexation practices (indexation to lagged inflation).
- Core result:
- Wage contracts indexed to lagged inflation tend to destabilize output regardless of whether shocks are nominal or real.
- Implicit theoretical implication:
- The classical duality from the earlier literature (indexation stabilizes for nominal shocks, destabilizes for real shocks) does not hold when realistic indexation lags are introduced.
Subject classification and keywords
- Subject: Inflation; Labor; Monetary base; Money; Prices; Wage adjustments; Wage indexation; Wages
- Keywords: aggregate wage; indexation clause; indexing money supply; indexing wage; Inflation; Monetary base; money supply; Wage adjustments; wage contract; Wage indexation; Wages; WP
Author and usage note
- 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.
Source: IMF Working Paper — "Wage Indexation and Macroeconomic Stability: The Gray-Fischer Theorem Revisted", Esteban Jadresic, November 1, 1996.