Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/100115 
Year of Publication: 
2013
Series/Report no.: 
Working Papers No. 2013-19
Publisher: 
Banco de México, Ciudad de México
Abstract: 
Wage indexation practices have changed. Evidence on the U.S. for instance suggests that wages were heavily indexed to past inflation during the Great Inflation but not during the Great Moderation. However, most DSGE models assume fixed indexation parameters in wage setting, which might not be structural in the sense of Lucas (1976). This paper presents a New-Keynesian model in which workers, by maximizing their welfare, set their wage indexation rule in response to aggregate shocks and monetary policy. We find that workers index their wages to past inflation when technology and permanent inflation-target shocks drive output fluctuations; when aggregate demand shocks do, workers index to trend-inflation. In addition, workers' choices do not coincide with the social planner's choice, which may explain the observed changes in wage indexation in the post-WWII U.S. data.
Subjects: 
Wage indexation
Welfare costs
Nominal rigidities
JEL: 
E24
E32
E58
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size
452.53 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.