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Monetary policy in the presence of asymmetric wage indexation

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  • Giuseppe Diana
  • Pierre-Guillaume Méon

Abstract

This paper studies monetary policy in the presence of asymmetric wage indexation. It is found that monetary authorities do not react to small output shocks and that their reaction to large shocks is asymmetric, insofar as they absorb positive shocks more than negative ones. As a consequence, asymmetric wage indexation skews the distribution of output to the left, and can therefore be contractionary. It has ambiguous effects on expected inflation, on the volatility of output and inflation, and on expected welfare, relative to an equivalent symmetric indexation. Optimal symmetric inflation however always outperforms optimal asymmetric indexation.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series DULBEA Working Papers with number 05-16.RS.

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Length: 34 p.
Date of creation: Sep 2005
Date of revision:
Publication status: Published by: DULBEA - Université libre de Bruxelles, Bruxelles
Handle: RePEc:dul:wpaper:05-16rs

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Keywords: monetary policy; wage indexation.;

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