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Monetary Policy in the Presence of Asymmetric Wage Indexation

  • Giuseppe Diana

    ()

    (BETA-theme, Université Louis Pasteur, Pôle Européen de Gestion, 61 Avenue de la Forêt Noire, 67085 Strasbourg Cedex, France)

  • Pierre-Guillaume Méon

    ()

    (Université Libre de Bruxelles (ULB), DULBEA, CP-140, 50 Avenue F.D. Roosevelt, 1050 Bruxelles, Belgium)

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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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2008)
Issue (Month): 1 (July)
Pages: 69-90

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Handle: RePEc:sej:ancoec:v:75:1:y:2008:p:69-90
Contact details of provider: Web page: http://www.southerneconomic.org/

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  17. Kandil, Magda, 1998. "Supply-Side Asymmetry and the Non-Neutrality of Demand Fluctuations," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 785-809, October.
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