Wage indexation and inflation persistence

  1. Víctor López Pérez 1
  1. 1 Centro de Estudios Monetarios y Financieros

    Centro de Estudios Monetarios y Financieros

    Madrid, España

Documentos de Trabajo ( CEMFI )

Year of publication: 2003

Issue: 3

Type: Working paper


This paper presents a model whose key feature is the existence of wage indexation clauses to lagged inflation. The main result that can be drawn is that the higher the proportion of labour contracts that include indexation clauses, the more important past inflation will be when explaining current inflation movements. However, a plausible (small) degree of indexation does not explain observed US inflation autocorrelations. Besides, optimal monetary policy is computed and the optimal degree of indexation is obtained. Finally, a two-country configuration is presented and the losses incurred as a result of setting a common monetary policy are calculated.