Anticipated Shocks and the Acceleration Hypothesis: The Implication of Wage Indexation

Abstract

In his well cited contribution, Sachs [14] sets up a macromodel embodying the wage setting process, perfect foresight, and the portfolio balance feature. It examines the exchange-rate and current-account responses to unanticipated fiscal expansion under alternative wage indexation rules. He finds that, in the nominal wage rigidity (no wage indexation) model, the exchange-rate depreciation coincides with a current account deficit; in the real-wage rigidity (full wage indexation) case, the exchange rate again depreciates with a current-account deficit and appreciates with a surplus [14, 744-45].' Sachs's result is consistent with Kouri's [12] acceleration hypothesis: a current-account deficit is accompanied by currency depreciation, and conversely. After the publication of the Dorbusch and Fischer [8] paper, the literature on acceleration hypothesis has shifted from unanticipated shocks to anticipated shocks. Dorbusch and Fischer [8] find that a negative correlation between the exchange rate and the current account prevails prior to the implementation of anticipated shocks. Consequently, their conclusion indicates the acceleration hypothesis is not held when the economy experiences anticipated shocks. Bhandari [4] and Papell [13] claim that the status of current account and the response of exchange rate can have either a positive or a negative correlation in response to anticipated shocks. Based on the fact that Sachs [14] does not deal with the anticipated disturbances, the first purpose of this paper thus tries to shed light on whether the alternative wage indexation schemes will affect the validity of the acceleration hypothesis in response to an anticipated fiscal expansion. In an interesting paper, Aoki [1] bases on the modified Dorbusch [7] model and examines the exchange-rate responses to anticipated supply shocks. He finds that an entirely different type of exchange-rate adjustment pattern-misadjustment path-can arise when economic vari-