Endogenous Wage Indexation and Aggregate Shocks

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 4816

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Business Fluctuations; Cycles ; Central Banks and Their Policies
• Subject: wage indexation ; welfare costs ; nominal rigidities

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Carrillo, Julio A. ; Peersman, Gert ; Wauters, Joris
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102123
• Last update: 10.03.2025, 11:42 AM CET