A General Equilibrium Approach to Indexation
(1988) , 19 pages
Files
WP-8805.pdf
Open Access - Adobe PDF
- 811.61 KB
Details
- Authors
- Abstract
- Indexation is a wage-fixing rule that gives nominal wages as functions of various price indices or indeed any other variable. In practice indexation has been largely used by politicians to elude the social conflict over the distribution of income (cf. Braun 1976) and this may perhaps explain why wages have often been linked to the consumer price index rather than to any other variable. Its use has traditionally been advocated by Monetarist theorists to accompany a reduction in the rate of growth of money. For instance Friedman (1974) writes “the side effects of changes in the rate of inflation can be substantially reduced by encouraging the widespread use of escalator clauses in private and governmental contracts” (Friedman 1974, p.25). Friedman (1974) lists several of these “side effects”: because expectations are slow to change producers will accumulate inventories rather than decrease their price and workers will be laid off rather than moderate their wage claims. Borrowers who have to pay a fixed nominal interest rate will be in serious difficulties too. “The reason for the side effects is the time delay between a decreased rate of growth of total money spendings and the full adjustment of output and prices to that changed rate of growth of total money spendings” (Friedman 1974, p.31). That is, the rate of growth of money has real effects because some trade is taking place at non market clearing prices.
- Affiliations
Citations
Frecaut, D. (1988). A General Equilibrium Approach to Indexation (Working Papers Institut des sciences économiques 8805). https://hdl.handle.net/2078.5/281047