Wage Indexation and Time-Consistent Monetary Policy

31 Pages Posted: 14 Aug 2007 Last revised: 24 Jul 2022

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

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

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. 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)

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