This paper investigates the effects of wage indexation on the time-consistent level of inflation. Departing from previous work on time-consistent policy, we study a structural model of the economy. Indexation reduces the cost of inflation, which is inflationary, and steepens the Phillips curve, which is anti-inflationary. In most cases, the net effect is to raise inflation but also to raise welfare: the loss from higher inflation is outweighed by the gain from greater protection against inflation.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
2948.
Length: Date of creation: Apr 1989 Date of revision: Publication status: published as "Wage Indexation and Discretionary Monetary Policy," American Economic Review, December 1991, pp. 1310-1319 Handle: RePEc:nbr:nberwo:2948
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