INDEXATION AND STABILIZATION

Abstract

This article describes early models of indexing as well as more recent models that call for less indexing of wages to prices in order to improve price and output stability. Policymakers may face a tradeoff: although increasing indexation may lead to macro-economic instability, reducing indexation may lead to greater income inequality and labor market tension. The article then concentrates on recent experiences, first in countries that have long histories of indexing (Brazil and Israel), then in countries that have reduced indexing (Chile, Finland, and Iceland) or that have used indexing under moderate inflation (Australia and Italy). Where disindexation worked, the costs of stabilization (involving both disindexation and fiscal correction) were recognized, and political agreements permitted an acceptable distribution of these costs.