"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Shameful Rate of Unemployment in the EMS 267
reflected entirely in higher prices, higher interest rates and a likely loss of purchasing
power of their financial assets.
From these considerations, one might conclude that is a strong case to program
zero, or near zero, inflation from the very beginning. Actually, there are a number
of considerations in favor of a gradual descent, at least if we start from nonnegligible
inflation. First, for reasons of equity, the programmed path of wages
must take into account the unexpired portion of existing contracts; and second,
one may wish to avoid substantial quick declines in nominal interest rates
and the resulting large transfers to lenders from borrowers who entered into the
borrowing contract at high interest rates on the expectation of a sluggish inflation
rate and nominal interest rate.
6.3 Programming the Real Wage, the Case of a Closed Economy
With respect to the real wage, let us conveniently start with the case of a closed
economy. We begin by recalling the basic identity:
p= w-rw
(8.1)
i.e. price inflation (p) = wage increase (w) - increase in real wage (rw). We next
recall that under the presumption of a relatively stable mark-up, (or stable
sharing), the increase in the real wage is equal to the increase in productivity
rw
= y.
(8.2)
We can then conclude that one can achieve any desired rate of inflation, say pˆ by
programming a nominal wage increase equal to pˆ + productivity growth
wˆ = pˆ + y.
(8.3)
This conclusion can be readily verified by substituting for w in (1) the ŵ given
by (8.3), and from (8.2), substituting y for rw, obtaining p = pˆ .
More generally, to achieve consistent programming of wages and prices, p
must equal w - y, or w must equal p + y.
6.4 Programming Real and Nominal Wages to Achieve Price
Stability, Fixed Exchange Rates and Full Employment in the EMS
We now proceed to consider a set of open economies, a subset of which, like the
members of EMS, share the desire to achieve those goals. We suggest that it is
possible to reach them simultaneously, but that this will require much greater
coordination of policies than the present one, which is largely limited to the area
of interest rates and possibly fiscal policy. In particular, it would have to be
extended to the coordination of wage policies.