NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Wage Indexation and Time-Consistent Monetary Policy

Laurence Ball, Stephen G. Cecchetti

NBER Working Paper No. 2948
Issued in April 1989
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w2948

Published: "Wage Indexation and Discretionary Monetary Policy," American Economic Review, December 1991, pp. 1310-1319

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