Summary of Some Macroeconomic Consequences of Wage Indexation
|Type of Wage Indexation|
|to Current Inflation||to Lagged Inflation|
|Cost of disinflation|
|Money-based||reduces||reduces if nonindexed contracts specify preset time-varying wages, raises if nonindexed contracts specify fixed wages|
|Exchange-rate-based||reduces||idem as in money-based stabilization|
|Closed economy 1/||depends on the variance of real and nominal shocks||reduces|
|Choice of exchange rate regime||prefer flexible exchange rate||choice with and without indexation similar|
|Level of inflation2/||ambiguous||ambiguous, but relatively more likely to increase inflation|
|Variability of Inflation||increases||ambiguous|
With fixed money supply.
If the monetary authority cannot credibly commit to maintain low inflation.