The Inflationary Impact of Wage Indexation
It is an open question whether and how indexed wage contracts reduce welfare or raise average inflation. This paper analyzes the impact of indexed wage contracts on inflation and social welfare in a Barro–Gordon model with discretionary monetary policy by endogenizing social costs of indexation. Main results are: Wage indexation reduces the inflation bias but may raise the variance of inflation rates. In social optimum wages are fully indexed to the price level, but this requires optimal wage adjustments to productivity shocks. If wage adjustments to productivity are suboptimal, the second best solution calls for non–indexed wage contracts and a central banker with balanced aspiration levels of employment and real wages. In case of decentralized wage bargaining, a prohibition of wage indexation may improve welfare.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
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.:
- 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.
- Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- Ball, Laurence & Cecchetti, Stephen G, 1991. "Wage Indexation and Discretionary Monetary Policy," American Economic Review, American Economic Association, vol. 81(5), pages 1310-19, December.
- Ball, Laurence, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 299-311, May.
- Giersch, Herbert, 1973. "Indexklauseln und Inflationsbekämpfung," Kiel Discussion Papers 32, Kiel Institute for the World Economy (IfW).
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
- Devereux, Michael, 1989. "A Positive Theory of Inflation and Inflation Variance," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 105-16, January.
- 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.
- John V. Duca & David D. VanHoose, 1998.
"The rise of goods-market competition and the fall of nominal wage contracting: endogenous wage contracting in a multisector economy,"
9805, Federal Reserve Bank of Dallas.
- Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 1-29, January.
- Adolph, Brigitte & Wolfstetter, Elmar, 1991. "Wage-Indexation, Informational Externalities, and Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 368-90, July.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
- Crosby, Mark, 1995. " Wage Indexation and the Time Consistency of Government Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 105-12, March.
- Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 282-92, April.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_867. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.