Endogenous wage indexation and aggregate shocks

Julio Carrillo, Gert Peersman () and Joris Wauters

Journal of Macroeconomics, 2022, vol. 72, issue C

Abstract: New Keynesian DSGE models assume a constant degree of wage indexation to past inflation, neglecting empirical and institutional evidence of a time-varying degree. We build a DSGE model with utility-maximizing workers that can endogenously choose the wage indexation rule. We find that workers index their wage to past inflation when shocks to productivity and the nominal anchor drive output fluctuations. By contrast, they index wages to the inflation target when aggregate demand shocks dominate. We further show that this decentralized equilibrium is not socially optimal, but explains the time-varying degree of wage indexation in US data very well.

Keywords: Wage indexation; Macro fluctuations; Equilibrium vs social optimum (search for similar items in EconPapers)
JEL-codes: E24 E32 E58 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Endogenous wage indexation and aggregate shocks (2017)
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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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:72:y:2022:i:c:s0164070422000192

DOI: 10.1016/j.jmacro.2022.103417

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