A note on the welfare consequences of wage indexing in a stochastic economy

Abstract

This note surveys the welfare and real consequences of wage indexing in a stochastic economy whose monetary authority lacks credibility. It shows in a unified framework that those consequences might differ markedly depending on the nature and timing of the dominant disturbance in that economy. It finally provides a closed-form expression of the optimal level of wage indexing when all the shocks are taken into account.