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Monetary policy in the presence of asymmetric wage indexation

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Author Info
Giuseppe Diana () (BETA-theme, Université Louis Pasteur, Strasbourg)
Pierre-Guillaume Méon () (DULBEA, Université libre de Bruxelles, Brussels)

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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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Publisher Info
Paper provided by Université libre de Bruxelles, Department of Applied Economics (DULBEA) in its series Working Papers DULBEA with number 05-16.RS.

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Length: 34 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:dul:wpaper:05-16rs

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Related research
Keywords: monetary policy; wage indexation.;

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Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Waller, Christopher J & VanHoose, David D, 1992. "Discretionary Monetary Policy and Socially Efficient Wage Indexation," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1451-60, November. [Downloadable!] (restricted)
    Other versions:
  2. Kandil, Magda, 1998. "Supply-Side Asymmetry and the Non-Neutrality of Demand Fluctuations," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 785-809, October. [Downloadable!] (restricted)
  3. Cukierman, A., 1999. "The Inflation Bias Result Revisited," Papers 38-99, Tel Aviv.
  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
    Other versions:
  5. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April. [Downloadable!] (restricted)
  6. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November. [Downloadable!] (restricted)
  7. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. David D. VanHoose & Christopher J. Waller, 1989. "Discretion, wage indexation, and inflation," Research Working Paper 89-03, Federal Reserve Bank of Kansas City.
  9. Devereux, Michael, 1987. "The effect of monetary variability on welfare in a simple macroeconomic model," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 427-435, May. [Downloadable!] (restricted)
  10. Gerlach, Stefan, 2003. "Recession aversion, output and the Kydland-Prescott Barro-Gordon model," Economics Letters, Elsevier, vol. 81(3), pages 389-394, December. [Downloadable!] (restricted)
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  11. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, 07. [Downloadable!] (restricted)
  12. Dolado, Juan J. & María-Dolores, Ramón & Naveira Barrero, Manuel, 2000. "Asymmetries In Monetary Policy Rules: Evidence For Four Central Banks," CEPR Discussion Papers 2441, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Milesi-Ferretti, Gian Maria, 1994. "Wage Indexation and Time Consistency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 941-50, November. [Downloadable!] (restricted)
  15. James Cover & David Hoose, 2002. "Asymmetric wage indexation," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(1), pages 34-47, March. [Downloadable!] (restricted)
  16. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110. [Downloadable!]
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  17. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, 09. [Downloadable!] (restricted)
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  18. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, vol. 67(2), pages 159-164, May. [Downloadable!] (restricted)
  19. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, vol. 49(2), pages 485-503, February. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Henri Capron, 2007. "Politique de cohésion et développement régional," Working Papers DULBEA 07-16.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  2. Olivier Debande & Jean-Luc De Meulemeester, 2008. "Quality and variety competition in higher education," Working Papers DULBEA 08-12.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
    Other versions:
  3. Ilan Tojerow, 2008. "Industry Wage Differential, Rent Sharing and Gender in Belgium," Working Papers DULBEA 08-20.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
    Other versions:
  4. Charles Plaigin, 2009. "Exploratory study on the presence of cultural and institutional growth spillovers," Working Papers DULBEA 09-03.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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