This paper investigates the effects of wage indexation on the time-consistent level of inflation. Departing from … previous work on time-consistent policy, we study a structural model of the economy. Indexation reduces the cost of inflation … raise inflation but also to raise welfare: the loss from higher inflation is outweighed by the gain from greater protection …

were large relative both to the level and trend of the expected rate of average wage inflation and to the existing relative … implies that, if the year-to-year variation in expected wage inflation were large relative to the year-to-year variation in … unexpected wage inflation, indexation would increase the year-to-year variation in minimum-wage employment …

The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, to (2 …