Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting

David Eagle () and Dale Domian
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Dale Domian: University of Saskatchewan

Macroeconomics from EconWPA

Abstract: 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.

Keywords: inflation indexing; inflation targeting; quasi-real indexing; nominal income targeting (search for similar items in EconPapers)
JEL-codes: E52 E31 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: Written 2003-12-29
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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