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Endogenous Wage Indexation and Aggregate Shocks

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  • JULIO CARRILLO
  • GERT PEERSMAN
  • JORIS WAUTERS

Abstract

wage indexation to past in ation, a finding that is at odds with the assumption of constant indexation parameters in most New-Keynesian DSGE models. We build a DSGE model with endogenous wage indexation in which utility maximizing workers select a wage indexation rule in response to aggregate shocks and monetary policy. We show that workers index wages to past in ation when output uctuations are primarily explained by technology and permanent in ation-target shocks, whereas they index to trend in ation when aggregate demand shocks dominate output uctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data.

Suggested Citation

  • Julio Carrillo & Gert Peersman & Joris Wauters, 2014. "Endogenous Wage Indexation and Aggregate Shocks," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/881, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:14/881
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    3. Basu, Parantap & Sarkar, Agnirup, 2016. "Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 293-306.

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    More about this item

    Keywords

    Wage indexation; Welfare costs; Nominal rigidities;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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