IDEAS home Printed from https://ideas.repec.org/p/bdr/borrec/198.html
   My bibliography  Save this paper

Wage Indexation, Inflation Inertia, and the Cost of Disinflation

Author

Listed:
  • Javier Gómez

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.

Suggested Citation

  • Javier Gómez, 2002. "Wage Indexation, Inflation Inertia, and the Cost of Disinflation," Borradores de Economia 198, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:198
    DOI: 10.32468/be.198
    as

    Download full text from publisher

    File URL: https://doi.org/10.32468/be.198
    File Function: Latest version
    Download Restriction: no
    File URL: https://libkey.io/10.32468/be.198?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    2. Javier Gómez & Juan Manuel Julio, 2001. "Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation," Borradores de Economia 168, Banco de la Republica de Colombia.
    3. John M. Roberts, "undated". "The Wage Curve and the Phillips Curve," Finance and Economics Discussion Series 1997-57, Board of Governors of the Federal Reserve System (U.S.), revised 04 Dec 2019.
    4. Bankim Chadha & Paul R. Masson & Guy Meredith, 2019. "Models of Inflation and the Costs of Disinflation," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 3, pages 57-99, World Scientific Publishing Co. Pte. Ltd..
    5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    7. Martha López P., 2001. "Seigniorage and the welfare cost of inflation in Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 19(39), pages 115-131, June.
    8. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-1185, July.
    9. Ball, Laurence & Croushore, Dean, 2003. "Expectations and the Effects of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 473-484, August.
    10. Karl Whelan, 1997. "Wage Curve vs. Phillips Curve : are there macroeconomic implications?," Open Access publications 10197/246, School of Economics, University College Dublin.
    11. Rudiger Dornbusch & Stanley Fischer, 1992. "La inflación moderada," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(1), pages 5-70, January-J.
    12. Laurence Ball & David Romer, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(3), pages 507-524.
    13. Esteban Jadresic, 1996. "Wage Indexation and the Cost of Disinflation," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 796-825, December.
    14. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-289, March.
    15. Stanley Fischer, 1986. "Indexing, Inflation, and Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561638, April.
    16. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-387, May.
    17. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
    18. Mr. Esteban Jadresic, 1996. "Wage Indexation and the Cost of Disinflation," IMF Working Papers 1996/048, International Monetary Fund.
    19. Ball, Laurence & Cecchetti, Stephen G, 1991. "Wage Indexation and Discretionary Monetary Policy," American Economic Review, American Economic Association, vol. 81(5), pages 1310-1319, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Bordo & Pierre Siklos, 2014. "Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspective," NBER Working Papers 20693, National Bureau of Economic Research, Inc.
    2. Javier Gómez & Juan Manuel Julio, 2003. "Transmission Mechanism and Inflation Targeting: The Case of Colombia's Desinflation," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 18(2), pages 109-133, December.
    3. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," Borradores de Economia 3603, Banco de la Republica.
    4. Sergio Parra Cely, 2009. "Costos De Inflación En Un Modelo De Búsqueda Monetaria Con Formación Endógena De Precios: El Caso Colombiano," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 27(59), pages 46-82, June.
    5. Mario Nigrinis Ospina, 2004. "Es lineal la Curva de Phillips en Colombia?," Borradores de Economia 282, Banco de la Republica de Colombia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," Borradores de Economia 3603, Banco de la Republica.
    2. Javier Gómez, "undated". "Wage Indexation, Inflation Inertia, and the Cost of Disinflation - New version," Borradores de Economia 198nv, Banco de la Republica de Colombia.
    3. repec:bdr:ensayo:v::y:2003:i:43:p:66-85 is not listed on IDEAS
    4. Javier Gómez & Juan Manuel Julio, 2003. "Transmission Mechanism and Inflation Targeting: The Case of Colombia's Desinflation," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 18(2), pages 109-133, December.
    5. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," Working Papers Central Bank of Chile 35, Central Bank of Chile.
    6. Javier Gómez & Juan Manuel Julio, 2001. "Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation," Borradores de Economia 168, Banco de la Republica de Colombia.
    7. Hofstetter, Marc, 2008. "Disinflations in Latin America and the Caribbean: A free lunch?," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 327-345, March.
    8. Mr. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," IMF Working Papers 1998/015, International Monetary Fund.
    9. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
    10. John A. Carlson, 2002. "Output Effects of Disinflation with Staggered Price Setting," Southern Economic Journal, John Wiley & Sons, vol. 68(4), pages 947-956, April.
    11. Gbaguidi, David, 2012. "La courbe de Phillips : temps d’arbitrage et/ou arbitrage de temps," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(1), pages 87-119, mars.
    12. Oscar Landerretche & Fernando Lefort & Rodrigo O. Valdés, 2002. "Causes and Consequences of Indexation: A Review of the Literature," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.),Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 2, pages 019-064, Central Bank of Chile.
    13. Esteban Jadresic, 2002. "The Macroeconomic COnsequences of Wage Indexation Revisited," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.),Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 8, pages 207-258, Central Bank of Chile.
    14. Musy, Olivier & Pereau, Jean-Christophe, 2010. "Disinflationary boom in a price-wage spiral model," Economic Modelling, Elsevier, vol. 27(1), pages 152-158, January.
    15. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    16. Adama Zerbo, 2018. "Essai d'une nouvelle représentation macroéconomique du marché du travail," Documents de travail 178, Groupe d'Economie du Développement de l'Université Montesquieu Bordeaux IV.
    17. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    18. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    19. Mr. Michael Kumhof & Mr. Luis Felipe Céspedes & Mr. Eric Parrado, 2003. "Pricing Policies and Inflation Inertia," IMF Working Papers 2003/087, International Monetary Fund.
    20. M. Ali Choudhary & Saima Mahmood & Gylfi Zoega, 2015. "Informal Labour Markets in Pakistan," BCAM Working Papers 1504, Birkbeck Centre for Applied Macroeconomics.
    21. Marc Hofstetter, 2006. "La política monetaria y la Corte Constitucional: el caso del salario mínimo," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(14), pages 105-124, January-J.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdr:borrec:198. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Clorith Angélica Bahos Olivera (email available below). General contact details of provider: https://edirc.repec.org/data/brcgvco.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.