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Wage Indexation, Inflation Inertia, and the Cost of Disinflation

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  • 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.

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  • 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
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    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.
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    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 Republica de Colombia, 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.

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    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

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