Wage Indexation and Time-Consistent Monetary Policy

Laurence Ball and Stephen Cecchetti

No 2948, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the effects of wage indexation on the time-consistent level of inflation. Departing from previous work on time-consistent policy, we study a structural model of the economy. Indexation reduces the cost of inflation, which is inflationary, and steepens the Phillips curve, which is anti-inflationary. In most cases, the net effect is to raise inflation but also to raise welfare: the loss from higher inflation is outweighed by the gain from greater protection against inflation.

Date: 1989-04
Note: EFG ME
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Published as "Wage Indexation and Discretionary Monetary Policy," American Economic Review, December 1991, pp. 1310-1319

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