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Endogenous Wage Indexation and Aggregate Shocks

Julio Carrillo, Gert Peersman () and Joris Wauters
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Joris Wauters: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: wage indexation to past in ation, a nding 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.

Keywords: Wage indexation; Welfare costs; Nominal rigidities (search for similar items in EconPapers)
JEL-codes: E24 E32 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2014-05
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Working Paper: Endogenous Wage Indexation and Aggregate Shocks (2014) Downloads
Working Paper: Endogenous Wage Indexation and Aggregate Shocks (2013) Downloads
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