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Wage Indexation and the Time Consistency of Government Policy

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  • Crosby, Mark

Abstract

This paper concerns the role of wage indexation as a mechanism for enabling an economy to achieve outcomes that would not otherwise be time consistent. The desirability of indexation depends on the size of real and nominal shocks and on a policymaker's incentives for short-run inflation surprises. Policymakers' incentives to utilize wage indexation are examined and it is found that 'weak' policymakers are more likely to choose wage indexation. Hence, in an electoral equilibrium, voters may choose a policymaker who cares more about unemployment than inflation but who chooses wage indexation to commit to low inflation. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Crosby, Mark, 1995. "Wage Indexation and the Time Consistency of Government Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 105-112, March.
    • Handle: RePEc:bla:scandj:v:97:y:1995:i:1:p:105-12
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    Cited by:

    1. Esteban Jadresic, 2002. "The Macroeconomic COnsequences of Wage Indexation Revisited," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.),Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 8, pages 207-258, Central Bank of Chile.
    2. James, Jonathan G. & Lawler, Phillip, 2010. "Union objectives and indexation externalities in a monopolistically competitive economy," Research in Economics, Elsevier, vol. 64(1), pages 28-35, March.
    3. Mr. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," IMF Working Papers 1998/015, International Monetary Fund.
    4. Oscar Landerretche & Fernando Lefort & Rodrigo O. Valdés, 2002. "Causes and Consequences of Indexation: A Review of the Literature," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.),Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 2, pages 019-064, Central Bank of Chile.
    5. Esteban Jadresic, 1998. "The Macroeconomic Consequences of Wage Indexation Revisited," Working Papers Central Bank of Chile 35, Central Bank of Chile.
    6. James, Jonathan G. & Lawler, Phillip, 2006. "Productivity, indexation and macroeconomic outcomes: The implications of goods market competition and wage bargaining structure," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 465-479.
    7. Frank Heinemann, 2003. "The Inflationary Impact of Wage Indexation," CESifo Working Paper Series 867, CESifo.
    8. Frank Heinemann, 2006. "Wage Indexation and Monetary Policy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 486-504, September.

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