Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102123
Authors: 
Carrillo, Julio A.
Peersman, Gert
Wauters, Joris
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4816
Abstract: 
Empirical and institutional evidence finds considerable time variation in the degree of wage indexation to past inflation, a finding that is at odds with the assumption of constant indexation parameters in most New-Keynesian DSGE models. We build a DSGE model with endogenous wage indexation in which utility maximizing workers select a wage indexation rule in response to aggregate shocks and monetary policy. We show that workers index wages to past inflation when output fluctuations are primarily explained by technology and permanent inflation-target shocks, whereas they index to trend inflation when aggregate demand shocks dominate output fluctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data.
Subjects: 
wage indexation
welfare costs
nominal rigidities
JEL: 
E24
E32
E58
Document Type: 
Working Paper

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