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Macroeconomic stabilization through taxation and indexation: The use of firm-specific information

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  • Marston, Richard C.
  • Turnovsky, Stephen J.

Abstract

This paper considers two alternative approaches to stabilizing an economy with firm-specific productivity disturbances. The first uses wage contracts tying wages in each firm to these disturbances as well as the price level. The second uses a tax on firms which modifies their supply behavior together with a simple waqe indexation rule tying wages to prices alone. Both these schemes are viable as long as the firm-specific disturbance is known to all agents. If the firm alone observes the productivity disturbance, under either scheme it has an incentive to misrepresent current conditions. However, a combination of these two schemes is both welfare maximizing and incentive compatible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 16 (1985)
Issue (Month): 3 (November)
Pages: 375-395

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Handle: RePEc:eee:moneco:v:16:y:1985:i:3:p:375-395

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  2. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  4. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  5. Azariadis, Costas & Stiglitz, Joseph E, 1983. "Implicit Contracts and Fixed Price Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 1-22, Supplemen.
  6. Joshua Aizenman, 1983. "Wage Contracts with Incomplete and Costly Information," NBER Working Papers 1150, National Bureau of Economic Research, Inc.
  7. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
  8. Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 282-92, April.
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Cited by:
  1. Joshua Aizenman & Jacob A. Frenkel, 1986. "Sectorial Wages and the Real Exchange Rate," NBER Working Papers 1801, National Bureau of Economic Research, Inc.

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