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Macroeconomic stabilization through taxation and indexation: The use of firm-specific information

  • Marston, Richard C.
  • Turnovsky, Stephen J.

This paper considers two alternative approaches to stabilizing an economy with firm-specific productivity disturbances. The first uses wage contracts tying wages in each firm to these disturbances as well as the price level. The second uses a tax on firms which modifies their supply behavior together with a simple waqe indexation rule tying wages to prices alone. Both these schemes are viable as long as the firm-specific disturbance is known to all agents. If the firm alone observes the productivity disturbance, under either scheme it has an incentive to misrepresent current conditions. However, a combination of these two schemes is both welfare maximizing and incentive compatible.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 16 (1985)
Issue (Month): 3 (November)
Pages: 375-395

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Handle: RePEc:eee:moneco:v:16:y:1985:i:3:p:375-395
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  1. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  2. Azariadis, Costas & Stiglitz, Joseph E, 1983. "Implicit Contracts and Fixed Price Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 1-22, Supplemen.
  3. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
  5. Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 282-92, April.
  6. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  7. Joshua Aizenman, 1983. "Wage Contracts with Incomplete and Costly Information," NBER Working Papers 1150, National Bureau of Economic Research, Inc.
  8. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
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