Are Wages an Important Determinant of Inflation in Slovenia?

Abstract

A key issue for macroeconomic stabilization and reform programs in transition countries is whether the persistence of moderate inflation results from the traditional causes of insufficiently tight financial policies and wage pressures or from conditions peculiar to transition economies: specifically the sizable adjustment of relative prices necessary for the transition to a market-based economy. Money growth, inertia, and wage pressures play a dominant role in explaining inflation in transition economies.' Five key variables largely explain the stickiness of inflation in transition economies (IMF 1998: 241-44; IMF 1997: 106-9): -inflation inertia reflecting explicit or implicit wage indexation and the slow adjustment of inflation expectations; -wage increases that are out of line with productivity gains; -monetary growth fueled by fiscal obligations, often reflecting delayed structural reforms; -underlying pressure for an appreciation of the real exchange