Discretionary Monetary Policy and Socially Efficient Wage Indexation
| Autor: | David D. VanHoose, Christopher J. Waller |
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| Rok vydání: | 1992 |
| Předmět: | |
| Zdroj: | The Quarterly Journal of Economics. 107:1451-1460 |
| ISSN: | 1531-4650 0033-5533 |
| Popis: | It is not uncommon for policy-makers, especially when they are trying to reduce inflation, to create incentives or restrictions that change individual decisions regarding nominal wage indexation. This raises a very interesting question for economists: if indexation of nominal contracts is the result of utility-maximizing behavior, why would policy-makers try to alter private indexation decisions? The usual rationale for governmental involvement in markets provided by microeconomic theory is that individual decisions may cause externalities that create a conflict between individual and social optima. Extending this logic to the case of indexation suggests that private indexation decisions may create an inflation externality and, thus, are not socially efficient. Blanchard [1979] and Ball [1988] have investigated the social efficiency of private decisions to index to the price level. They find that the equilibrium degree of wage indexation to the price level is socially inefficient if indexation to other relevant variables is costly. Since indexation costs do not appear to be empirically significant, these models do not provide a very convincing argument for governmental involvement in the indexation process. Furthermore, these models do not tie the degree of indexation to the trend inflation rate, which seems to be the crucial element for justifying governmental intervention. Thus, in order to pinpoint the exact nature of this externality, a model is required that considers endogenous wage indexation but links indexation to the trend inflation rate. Devereux [1987, 1989] uses such a model to examine the relationship between indexation and mean inflation. By combining a Gray [1976] indexation model with a Barro-Gordon [1983] inflation model, he shows that wage indexation affects the mean inflation rate, but he does not address the issue of indexation efficiency. In this paper we use a synthesis of Ball and Devereux's models to demonstrate that individual indexation decisions are, in general, socially inefficient. However, in contrast to Blanchard and Ball's |
| Databáze: | OpenAIRE |
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