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Monetary policy in the presence of asymmetric wage indexation

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  • Pierre-Guillaume Méon
  • Giuseppe Diana

Abstract

We study optimal monetary policy in the presence of asymmetric wage indexation. We find that the 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, we observe that asymmetric wage indexation can be contractionary. It has ambiguous effects on expected inflation and 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 ULB Institutional Repository with number 2013/8354.

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Date of creation: Jul 2008
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Publication status: Published in: Southern Economic Journal (2008) v.75 n° 1,p.69-90
Handle: RePEc:ulb:ulbeco:2013/8354

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Keywords: E30; £61. J30; monetary policy; wage indexation;

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  1. 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.
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