Endogenous wage indexation and aggregate shocks

Julio Carrillo, Gert Peersman () and Joris Wauters

No 604, BIS Working Papers from Bank for International Settlements

Abstract: Empirical and institutional evidence finds considerable time variation in the degree of wage indexation to past inflation, 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 inflation when output fluctuations are driven by technology and permanent inflation-target shocks, whereas they index to trend inflation when aggregate demand shocks dominate output fluctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data.

Keywords: Wage indexation; Welfare costs; Nominal rigidities (search for similar items in EconPapers)
Pages: 48 pages
Date: 2017-01
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Endogenous wage indexation and aggregate shocks (2022)
Working Paper: Endogenous Wage Indexation and Aggregate Shocks (2014)
Working Paper: Endogenous Wage Indexation and Aggregate Shocks (2014)
Working Paper: Endogenous Wage Indexation and Aggregate Shocks (2013)
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