When inflation is chronic, firms develop indexation practices that automatically tie the growth of prices, wages, and other contracts to the performance of some comprehensive price index. The microeconomic advantages of indexation are evident and derive from the immunization of the relative price system against the extravagances of inflation. From a macroeconomic perspective, however, this practice has been criticized for perpetuating the inflationary thrust, accentuating its volatility, and influencing the process of relative price adjustments in the face of real shocks. Those in charge of monetary policy generally oppose indexation under the argument that it raises the costs of reducing or controlling inflation, and its elimination has been considered a prerequisite for ensuring the success of the drastic stabilization plans that have been implemented in countries with a long history of inflation.
Attribution-NonCommercial-NoDerivs 3.0 Chile
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