This paper investigates the welfare properties of equilibrium indexation in a decentralized economy. If indexation is costless, so that all firm s index, then the equilibrium degree of indexation is efficient. But if indexation is costly and this leads some firms not to index, equi librium indexation is inefficient because indexation has externalitie s for nonindexed firms. Firms choose too little indexation if labor d emand is more responsive to movements in real money than to movements in real wages. The results do not depend on the relative importance of real and nominal shocks. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Volume (Year): 103 (1988) Issue (Month): 2 (May) Pages: 299-311 Download reference. The following formats are available: HTML
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