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Benassi, Corrado
Scorcu, Antonello
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Quaderni - Working Paper DSE No. 450
Nominal wage adjustment is modeled as resulting from bargaining between a risk neutral …rm and a risk averse worker, in an environment where the rate of in‡ation is a random variable. Risk aversion makes for endogenous indexation arrangements, which deliver partial indexation as they exploit imperfect in‡ation indices; risk aversion also generates a positive correlation between indexation and in‡ation variance. The model suggests a distinction between complete vs incomplete in‡ation adjustment on the one hand, and perfect vs imperfect adjustment on the other hand.
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