Wage Indexation and Time-Consistent Monetary Policy

31 Pages Posted: 14 Aug 2007 Last revised: 25 Jul 2010

See all articles by Laurence Ball

Laurence Ball

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 1989

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.

Suggested Citation

Ball, Laurence M. and Cecchetti, Stephen G., Wage Indexation and Time-Consistent Monetary Policy (April 1989). NBER Working Paper No. w2948. Available at SSRN: https://ssrn.com/abstract=461383

Laurence M. Ball (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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International Monetary Fund (IMF) ( email )

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Stephen G. Cecchetti

Brandeis International Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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