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Is Equilibrium Indexation Efficient?

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  • Ball, Laurence

Abstract

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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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 103 (1988)
Issue (Month): 2 (May)
Pages: 299-311

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Handle: RePEc:tpr:qjecon:v:103:y:1988:i:2:p:299-311

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. James, Jonathan G. & Lawler, Phillip, 2006. "Productivity, indexation and macroeconomic outcomes: The implications of goods market competition and wage bargaining structure," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 465-479.
  2. Daniels, Joseph P. & VanHoose, David D., 2013. "Exchange-rate pass through, openness, and the sacrifice ratio," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 131-150.
  3. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1336-1347, December.
  4. Duca, John V. & Vanhoose, David D., 1998. "The Rise of Goods-Market Competition and the Decline in Wage Indexation: A Macroeconomic Approach," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 579-598, July.
  5. Daniels, Joseph P. & Nourzad, Farrokh & VanHoose, David D., 2006. "Openness, centralized wage bargaining, and inflation," European Journal of Political Economy, Elsevier, vol. 22(4), pages 969-988, December.
  6. James Cover & David Hoose, 2002. "Asymmetric wage indexation," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(1), pages 34-47, March.
  7. Liam Graham & Dennis J. Snower, 2007. "Hyperbolic Discounting and the Phillips Curve," Kiel Working Papers 1346, Kiel Institute for the World Economy.
  8. Lawler, Phillip, 1998. "Wage Indexation and Government Intervention under Perfect Information," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 189-197, January.
  9. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
  10. Frank Heinemann, 2003. "The Inflationary Impact of Wage Indexation," CESifo Working Paper Series 867, CESifo Group Munich.
  11. Ball, Laurence & Romer, David, 1989. "The Equilibrium and Optimal Timing of Price Changes," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 179-98, April.
  12. James, Jonathan G. & Lawler, Phillip, 2008. "Aggregate demand shocks, private signals and employment variability: Can better information be harmful?," Economics Letters, Elsevier, vol. 100(1), pages 101-104, July.
  13. James, Jonathan G. & Lawler, Phillip, 2010. "Union objectives and indexation externalities in a monopolistically competitive economy," Research in Economics, Elsevier, vol. 64(1), pages 28-35, March.
  14. John V. Duca & David D. VanHoose, 1998. "The rise of goods-market competition and the fall of nominal wage contracting: endogenous wage contracting in a multisector economy," Working Papers 9805, Federal Reserve Bank of Dallas.

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