THE DEVELOPMENT OF THE SAWTOOTH WAGES MODEL OF INFLATION

Abstract

This paper covers the development of the sawtooth wages model, a graphical representation of the behavior of periodically adjusted fixed nominal wages under persistent inflationary conditions. Ranging from the immediate postwar years to the late 1980s, our narrative covers the history of the model, underscoring Bent Hansen’s (1951) contribution, followed by several improvements that aimed to incorporate into inflation theory several institution-specifc traits of underdeveloped economies. The diagram had a lukewarm reception in the 1960s but managed to defend its legacy until the 1980s, as the inertial inflation hypothesis gained terrain in the debate on economic stabilization in Latin America. Under the widespread diffusion of indexation practices, the model was then fully rehabilitated as a workhorse for theoretical and policy analysis in Brazil until a succesful stabilization was achieved in 1994 under the Real plan.