Nominal Wage Indexation, Quasi‐equilibria and Real Wage Dynamics

Abstract

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations, I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic 'quasiequilibrium'. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long-run quasi-equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a 'wage-aspiration effect' might lead to the persistence of involuntary unemployment.

How Long does a Generation Last? Assessing the Relationship Between Infinite and Finite Horizon Dynamic Models*

“…In this section, I develop a simple 2-period OLG model that draws on Guerrazzi (2007Guerrazzi ( , 2010. Specifically, the representative household that lives for 2 periods is assumed to solve the following problem:…”

“…Here I develop a 2-period OLG model that draws on Guerrazzi (2007Guerrazzi ( , 2010 whoamong the others explores the behaviour of optimising households endowed with logarithmic preferences whose choices are bound by constraints like the one in (3). Specifically, the household that lives for two periods is assumed to solve the following problem:…”