Causes and Macroeconomic Consequences of Time Variations in Wage Indexation

This dissertation consists of four related papers investigating the causes and consequences of time variations in the degree of wage indexation. Both empirical (structural) estimation and theoretical approaches are adopted in the investigation of the subject. Chapter 2 and Chapter 3 explore the causes while Chapter 3, Chapter 4 and Chapter 5 investigate the consequences. The main findings of this dissertation are as follows. Trend inflation is the most significant variable influencing the level of wage indexation while labour market institutional variables regarding wage (indexation) negotiations explain the variances of wage indexation and of inflation. The possibility of heavy-tailed distributed macroeconomic variables is the main consequence of time variations in wage indexation

Time-Varying Degree of Wage Indexation and the New Keynesian Wage Phillips Curve

Cost-of-Living-Adjustment (COLA) coverage figures suggest a time variation in the degree of wage indexation. In spite of this observation, most current literature conveniently assume a constant degree of indexation as this variable is not directly observable. This study intends to empirically measure the time variation in the degree of wage indexation. To this end, we derive a reduced form version of the New Keynesian Wage Phillips Curve under the assumption of a time varying degree of wage indexation. A state-space methodology is then employed in estimating this model using data of selected OECD countries. The study subsequently investigates variables influencing the time variation in the degree of wage indexation. Our results consistently suggest a substantial time variation in the degree of wage indexation in all countries considered. The wage indexation estimates obtained for the US bear remarkable similarities with the figures suggested by COLA coverage. It is subsequently shown that variations in trend inflation significantly explain variations in the degree of wage indexation. Finally, there is weak evidence in support of the Gray hypothesis that wage indexation is negatively correlated with the variance of productivity shocks

Monetary Policy in the Presence of Random Wage Indexation

Empirical estimations suggest heavy-tailed unconditional distributions for inflation, the output gap and the interest rate. However, standard NK models used in policy analysis imply normal distributions for these variables. In this study, we propose a model which replicates the above mentioned empirical features of inflation,the output gap and the interest rate and subsequently investigate the conduct of monetary policy in this model. The novelty of this study is the introduction of random wage indexation as a source of multiplicative shocks. The findings of this study include the following: Firstly, the unconditional distributions of inflation, the output gap and the interest rates exhibit heavy-tailed characteristics. Secondly, under an indexation to lagged inflation scheme, there exists a positive relationship between expected inflation and conditional variance of inflation. Finally, it is better to target current inflation rather than lagged inflation when conducting monetary policy under a Taylor rule