A note on the Pazos-Simonsen mechanism and Kaldor's early research on Latin American inflation

Abstract

In contrast with the inflationary finance story, inflation acceleration in Latin America has been explained as the result of the interaction of inflation dynamics and the frequency of wage adjustments. Accordingly, small inflation disturbances are connected with a shift from moderate to high inflation (or beyond to hyperinflation) though a mechanism that makes adjustment intervals in wage contracts endogenous. Rudiger Dornbusch (1986) labeled this process the "Pazos-Simonsen mechanism". In this note we summarize the basic contribution of both Felipe Pazos (1978) and Mario Henrique Simonsen (1983) and find crucial differences between their views on wage dynamics, specifically regarding the endogeneity of the time interval between wage readjustments. A remarkable affinity with Pazos's view on wage dynamics and inflation is found in an early and almost unknown essay written by Nicholas Kaldor in 1957 (inspired in his brief experience in Latin America).

Reaching a Broader Audience: Mario Henrique Simonsen’s International Career

“…In this decade, his most important pieces of work were: i) the introduction of the cash-in-advance restriction in a discussion of the possibility of a boundary equilibrium prompted by the Patinkin controversy (Boianovsky, 2002;Simonsen, 1964); ii) and what came to be known in Brazil as "Simonsen's curve", that is, a discussion of the impacts of inflation on real wages when nominal wages are fixed by contracts. As noted by Vera (2013), that was actually first discussed by Kaldor (1957) in a conference organized by Gudin (which, for this reason, although we cannot know for sure, it is possible that Simonsen even attended the very conference) in Rio de Janeiro which was later published in RBE.…”

A Second-Generation Structuralist Transformation Problem: The Rise of the Inertial Inflation Hypothesis

“…In a regime of chronic inflation, Simonsen added, the real incomes undergo an oscillatory behavior that is virtually consistent at the aggregate level, for when some groups obtain their peak real income, others are at their “trough” real income, and others are midway, given the unsynchronized structure of income adjustments, later known as the “sawtooth model” of nominal incomes under inflation (Vera 2013). In aggregate terms, Simonsen argued, “everything appears as if individuals, instead of living purchasing power cycles, remained in the comfortable stability of average income levels , ” a point Furtado had made about the dynamic neutrality concept a decade before (see section above).…”

Mário Henrique Simonsen e a construção do conceito de inflação inercial

“…Em relato mencionado em Barbosa (1997, p. 118), o próprio teria mencionado "ter visto algo semelhante num relatório de uma comissão estrangeira que tinha feito uma análise da inflação chilena na década dos 50". de qualquer forma, Vera (2008) chama a atenção para um trabalho de Kaldor escrito em decorrência de uma série de palestras que ele ministrou na Fundação Getulio Vargas (FGV), em outubro de 1956, e publicado na Revista Brasileira de Economia (RBE) em 1957.…”