Implications of Economic Interdependence for Endogenous Wage Indexation Decisions

Jay H. Bryson, Chih‐huan Chen and David VanHoose

Scandinavian Journal of Economics, 1998, vol. 100, issue 4, 693-710

Abstract: This paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices. If stochastic disturbances are common across countries, interdependence has no effect on equilibrium indexation choices in identical countries. However, if disturbances are country specific, numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy. We also show that indexation choices may be either strategic complements or strategic substitutes, but that strategic complementarity becomes more likely as the degree of interdependence rises.

Date: 1998
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