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Wage Indexation and Time Consistency

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  • Milesi-Ferretti, Gian Maria

Abstract

This note presents a simple model where the decision on the degree of wage indexation is taken by a 'large' agent, such as the government. The optimal degree of indexing is shown to depend on the variance of real shocks and on the 'inflations bias' of the government, due to the incentive to raise employment above the market-clearing level. Wage indexation will be low if real shocks are large and if the government is inflation-averse. The ability of monetary policy to offset monetary disturbances makes them irrelevant to the determination of the optimal degree of indexing. Copyright 1994 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 4 (November)
Pages: 941-50

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:4:p:941-50

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Christopher Crowe, 2004. "Inflation, inequality and social conflict," LSE Research Online Documents on Economics 19932, London School of Economics and Political Science, LSE Library.
  2. Giuseppe Diana & Pierre-Guillaume Méon, 2008. "Monetary Policy in the Presence of Asymmetric Wage Indexation," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 69-90, July.
  3. Crowe, Christopher, 2008. "Goal independent central banks: Why politicians decide to delegate," European Journal of Political Economy, Elsevier, vol. 24(4), pages 748-762, December.
  4. Oscar Landerretche & Fernando Lefort & Rodrigo O. Valdés, 2002. "Causes and Consequences of Indexation: A Review of the Literature," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 2, pages 019-064 Central Bank of Chile.
  5. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," IMF Working Papers 98/15, International Monetary Fund.
  6. Chris Crowe, 2004. "Inflation, Inequality and Social Conflict," Money Macro and Finance (MMF) Research Group Conference 2004 69, Money Macro and Finance Research Group.

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