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Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting

  • David Eagle

    (Eastern Washington University)

  • Dale Domian

    (University of Saskatchewan)

Unanticipated inflation or deflation causes one party of a nominal contract to gain at the expense of the other party, an effect absent in macroeconomic models with one representative consumer or with consumers having identical consumption. In this paper's general dynamic and stochastic equilibrium model, diverse consumers maximize risk-averse utility and rent labor and land to profit-maximizing firms. Both inflation indexing and strict inflation targeting are Pareto inefficient. When Pareto sharing of changes of aggregate supply is proportional, nominal contracts under perfect nominal income targeting are Pareto efficient, while quasi-real contracts are Pareto efficient regardless.

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Paper provided by EconWPA in its series Macroeconomics with number 0312010.

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Length: 41 pages
Date of creation: 29 Dec 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0312010
Note: Type of Document - pdf; prepared on WinXP; to print on HPLaserJet 8100 PCL6; pages: 41; figures: Figures included in text.
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