Abstract
This paper investigates exchange rate pass-through inflation, and the wage bargaining process, in a developing economy in which firms’ market power is largely dependent on technical progress embodied in imported intermediates and capital goods. It develops a heterodox model of income distribution, based on theoretical contributions from Latin American structuralists, labor market segmentationists and post-Keynesian writers, and it presents supportive empirical evidence from the Mexican economy. JEL Classification: E11; E12; E31; J31; O11.
Highlights
Conventional macroeconomic theory, by assuming representative agents and competitive markets, has been unable to deal with the heterogeneous structures of production typical of developing countries.Many writers have denied the uniqueness of economic theory, with regard to growth constraints and inflation determinants, in semi-industrialized countries.In the late 1940s, a group of economists working at the United Nations Commission for Latin America claimed that the development process in backward economies could not be explained as a stage of capitalist development following the same path of early industrialized nations (Prebisch, 1949, 1983; Rodríguez, 1980; Bielchowsky, 1998)
In the following two sections, we present empirical evidence on price and wage behavior in the Mexican economy, which cannot be satisfactorily explained by other approaches to income distribution and inflation, but are consistent with the conclusions derived from the model outlined in this paper
We have attempted to demonstrate that two traits of a developing economy, namely its dependence on imported technology, intermediates and capital goods, and its excess supply of unskilled labor, bring about significant differences in the way the price level responds to exchange rate variations, bank credit expansion and wage rate increases, as compared with a developed economy
Summary
This paper investigates exchange rate pass-through inflation, and the wage bargaining process, in a developing economy in which firms’ market power is largely dependent on technical progress embodied in imported intermediates and capital goods.
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