Imported Materials Prices, Wage Policy, and Macroeconomic Stabilization

Abstract

This paper analyzes two simple wage rules that keep employment constant when there are shocks to the prices of imported materials. One rule ties nominal wages to the GNP deflator rather than the consumer price index. The second rule, followed by Japan after the second oil price shock, ties the real wage to real GNP. The paper shows the effects on output, real income, and other macroeconomic variables of choosing either rule in place of the real wage stability provided by conventional wage indexation.