DISINFLATION AND REAL WAGES - AN ALTERNATIVE APPROACH - COMMENT ON AGENOR

IN A RECENT issue of Staff Papers, Agenor (1996) provides an excellent survey of the role of the labor market in the transmission process of adjustment policies in developing countries. In that paper, Agenor (1 996) sets up a macroeconomic model embodying both backward-and forward -looking contracts and examines possible dynamic paths of the inflatio n rate and real wage in response to an exchange-rate-based stabilizati on program. He finds that, regardless of the types of wage contract, b oth the inflation rate and the rate of growth of nominal wages are equ al to the devaluation rate in the long run.(1) This paper proposes an alternative model with a different price equation and shows that simil ar results in line with Agenor's finding will be obtained in this alte rnative model.