Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation / Stanley Fischer.

Format:

Book

Author/Creator:

Fischer, Stanley.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1497.

NBER working paper series no. w1497

Language:

English

Subjects (All):

Foreign exchange--Mathematical models.

Foreign exchange.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Real Balances, the Exchange Rate and Indexation

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1984.

Cambridge, Massachussetts : National Bureau of Economic Research, [1984]

Summary:

The recent appreciation of the dollar is widely believed to have reduced the output costs of the disinflation. But there remains the question of whether those early gains have to be repaid when the exchange rate depreciates.The first question taken up is the effect of real exchange rate appreciation on the sacrifice ratio, or output cost, of disinflation. There is no unambiguous presumption that exchange rate appreciation reduces the sacrifice ratio. The direct favorable effects of cheaper imports on consumer prices, on the prices of imported inputs, and on wage demands, may be outweighed by the unemployment resulting from the reduced demand for exports. In the second part of the paper I examine the affects of wage indexation on the sacrifice ratio. Economists have argued that wage indexation speeds up disinflation; policymakers take the opposite view. The distinction between ex ante and ex post indexing, defined in the paper, explains these different views. Ex ante wage indexation speeds up disinflation. With expost indexation the real wage automatically rises when the inflation rate falls. Even so, ex post indexing may speed up disinflation. But there has to be subsequent downward adjustment of the wage if long-term unemployment is to be prevented.

Notes:

Print version record

November 1984.