Reputation and Indexation in an Inflation Targeting Framework
This paper explores the relationship between a policymaker's reputation and the optimal wage indexation in an inflation-targeting framework, in which there is uncertainty regarding the policymaker's ability for commitment. The simulation results suggest that the optimal wage indexation is non-monotonic in the policymaker's reputation. In particular, at low levels of reputation, a rise in reputation leads to an increase in the wage indexation, while at higher levels of reputation, a rise in reputation leads to a reduction in the wage indexation. This result holds both in the social planner framework and in the case where there is a labor union that determines not only the nominal wage but also its level of indexation.
Key words: Inflation targets, reputation, wage indexation.