Signalling, Wage Controls and Monetary Disinflation Policy

Wage and price controls have a long and somewhat disreputable history, presumably because of their frequent use in many countries as short run substitutes for measure~ with more lasting effects on the inflation rate. But, in 1985 and 1986, Argentina, Brazil, and Israel used extensive wage-price controls as part of more comprehensive disinflation programs, .often labeled "heterodox" stabilization programs. To date, the Israeli stabilization seems to have succeeded, while the Argentinean and Brazilian stabi1izations have clearly ended in failure. This experience raises many questions. One view is that controlling one nominal variable, namely the money supply, is enough to bring down inflation provided that sound fiscal policies are also adopted. Therefore, wage and price controls should be avoided, because of their microeconomic costs. It is clear that controls do have microeconomic costs, but can they also have macroeconomic benefits? Under which circumstances do controls help in bringing down inflation, and when do they just suppress it temporarily? What is the required supporting role of fiscal and monetary policy while they are in place? These are the issues addressed in this paper.