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Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

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  • Richard C. Marston

Abstract

This paper examines the desirability of wage indexation in an open economy subject to economic disturbances which change the terms of trade and raise the prices of imported goods. Two indexation rules are considered, the traditional form of indexation to the consumer price index and indexation to the price of domestic goods alone, the latter proposed as a means of limiting the influence of import prices on the economy. The effects of the rules are shown to depend upon how the terms of trade rather than import prices alone respond to disturbances, since changes in the terms of trade determine what adjustments are required in the two real wages faced by firms and labor.

Suggested Citation

  • Richard C. Marston, 1982. "Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy," NBER Working Papers 1046, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1046
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    References listed on IDEAS

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    1. Richard C. Marston, 1981. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc.
    2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    3. Brunner, Karl & Meltzer, Allan H., 1977. "Stabilization of the domestic and international economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 1-6, January.
    4. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 43-66.
    5. Richard C. Marston, 1982. "Wages, Relative Prices and the Choice between Fixed and Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 15(1), pages 87-103, February.
    6. Anne Romanis Braun, 1976. "Indexation of Wages and Salaries in Developed Economies (Indexation des traitements et salaires dans les pays développés) (Indización de sueldos y salarios en economías desarrolladas)," IMF Staff Papers, Palgrave Macmillan, vol. 23(1), pages 226-271, March.
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    Cited by:

    1. Lucy Rees & Rod Tyers, 2004. "On the Robustness of Short Run Gains from Trade Reform," CEPR Discussion Papers 474, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    2. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
    3. Richard C. Marston & Stephen J. Turnovsky, 1985. "Imported Materials Prices, Wage Policy, and Macro-economic Stabilization," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 273-284, May.
    4. Matthew B. Canzoneri & John M. Underwood, 1982. "Wage contracting, exchange rate volatility, and exchange intervention policy," International Finance Discussion Papers 212, Board of Governors of the Federal Reserve System (U.S.).
    5. Joshua Aizenman, 1983. "Wage Contracts with Incomplete and Costly Information," NBER Working Papers 1150, National Bureau of Economic Research, Inc.

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