NOMINAL WAGE INDEXATION, QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

Marco Guerrazzi

Bulletin of Economic Research, 2010, vol. 62, issue 3, 279-294

Abstract: In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations, I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.

Date: 2010
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https://doi.org/10.1111/j.1467-8586.2009.00330.x

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