wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

spot and futures prices of nonstorable commodities under rational expectations the paper examines the effect of the presence of a commodity futures market upon the price formation process in a stochastic rational expectations framework an optimizing model with price uncertainty and risk aversion is used in order to solve equilibrium distributions of prices for nonstorable commodities the existence of futures trading does not affect the degree of short term spot price fluctuations however if the commodity market disturbance that originates from stochastic consumption demand is serially dependent then the long term price variation is smaller with a futures market than without it futures prices fluctuate less variably over time than spot and expected prices finally there exists a futures intervention rule whereby the authority can stabilize spot prices and raise the overall welfare of society

testing for asymmetric pricing in the canadian retail gasoline market abstract this paper applies a threshold regression model to test for asymmetric pricing in the retail gasoline market in canada using weekly data for the period january 1990 to december 1996 we present results for 13 canadian cities for both premium and regular gasoline within the context of an error correction model we test for the presence of asymmetric price behaviour using average changes in crude prices as well as various lags for the change in crude as possible thresholds we are unable to find any evidence to support this view

rockets and feathers the asymmetric speed of adjustment of uk retail gasoline prices to cost changes abstract the paper develops a quadratic quantity adjustment model to test the hypothesis put forward in the recent monopolies and mergers commission report that the speed of adjustment of uk retail gasoline prices to cost changes is more rapid when costs rise than when they fall and that the adjustment path is more concentrated around the mean value on the upswing using data from 1982 to 1989 evidence of faster and more concentrated responses to cost increases were found

localized competition heterogeneous firms and vertical relations this paper investigates the link between firms geographic configuration and market power in imperfect markets we consider two related setups the first illustrates the relevant characteristics of the pricing equilibrium a main implication is that the equilibrium price vector changes in accordance with the firms spatial configuration the second where firms operate as downstream retailers affiliated to rival upstream wholesalers shows that upstream market power is strongly affected by an index of geographic concentration which reflects the spatial configuration of retailers finally our analysis provides several insights for market delineation as well as merger evaluation and remedies

indexing and inflation abstract much of the opposition to indexation as a means of adapting to ongoing inflation arises from the view that indexation is itself inflationary this paper examines the basic for that view in a simple macroeconomic model in which budget deficits are in part financed through the printing of money it is shown that all aspects of indexing wage indexation bond indexation and tax indexation tend to increase the impact on the price level of any inflationary shock however this association between indexation and inflation is in large part a consequence of the monetary and fiscal policies being followed by the government evidence from a cross section of forty countries on the effects of indexation on the inflationary impact of the oil price shock of 1973 1974 suggests that indexation did not in general increase the inflationary impact of the oil shock the evidence is further consistent with the view that the absence of an excess inflationary effect of indexation is a result of the countries with substantial indexation not having accommodated the oil price shock as much as other countries

time consistency indexation and the costs of inflation abstract we examine the effects of indexation measures on inflation costs of inflation and economic welfare within the barro gordon journal of political economy 1983 91 589 610 model the main result is that wage indexation in addition to making the phillips curve steeper also reduces the marginal cost of inflation which is inflationary

inflation variability real wage variability and production inefficiency in recent years economists have paid considerable attention to the relation between the rate of inflation and its temporal variance the consensus emerging from this discussion is that there exists a strong positive relation between the inflation rate and its temporal variance see for example okun 1971 gordon 1971 jaffe and kleiman 1977 and foster 1978 clearly the increased variability of the inflation rate is likely to involve social costs that concern inefficiency in consumption and in production thus in his nobel lecture friedman 1977 says the growing volatility of inflation and the growing departure of relative prices from the values that market forces alone shall set combine to render the econoniic system less efficient p 470 in general the interpretation given to production inefficiency resulting from increased variability in the inflation rate is that of a reduction in output to a level lower than that occurring under price stability for example levi and makin interpret friedman s inefficiency argument thus from the two components of friedman s argument we have that high inflation accompanied by high variability of inflation will mean a lower output levi and makin 1980 p 1023 it is our purpose in this paper to elaborate on the concept of the production inefficiency caused by increased inflation variability iv where we focus on the variability in the real wage caused by inflation variability we suggest a concept of inefficiency of production that relates average changes in the use of labour to average changes in output specifically it is shown that iv alters output and or labour employment in a way that is inferior to the relation between output and employment under stable prices that we suggest is the crux of production inefficiency resulting from iv this production inefficiency will emerge as a result of iv independently of whether output rises or falls as a result of iv indeed our analysis will illustrate that mean output may increase or decrease so that by using output alone as an index of efficiency we may obtain the unlikely result that iv raises production efficiency one result we derive en route is that under plausible assumptions about the production function labour employment may on average rise with iv notwithstanding this we show that efficiency in production declines this result may be used as an interpretation of the inefficiency concept as used by friedman thus friedman says these developments clearly lower economic efficiency it is less clear what their effect is on recorded unemployment 1977 p 466 we proceed by considering the basic model and showing the ambiguity of the effect of inflation variability on mean output in section i in section ii we show that iv introduces a production inefficiency defined upon the

the effect of ownership structure on prices in geographically differentiated industries i analyze how ownership structure and market geography jointly influence fast food prices i estimate a model of demand and supply that accounts for the market geography and run counterfactual experiments that demonstrate how mergers affect prices i find that the impact of mergers can be large that this impact decreases as the merging outlets are farther apart that mergers among market leaders generally increase prices more than mergers among weaker firms and that mergers can increase prices even if the outlets are so far apart that neither outleti s presence affects prices at the other before the merger

the indexation of wages and bonds in brazil this paper analyses the dynamic relationship between the degrees of indexation of wages and public bonds in brazil a simple model is constructed to show that both degrees of indexation are determined simultaneously we apply cointegration techniques and estimate error correction representations to assess the temporal causality between them our results provide empirical support for the existence of simultaneity in the degrees of indexation in brazil in the period 1980 93

discretion wage indexation and inflation it is now well understood that discretionary policy making frequently leads to socially sub optimal outcomes this point was first made by kydland and prescott 12 using an example of a monetary policy game they argued that in the presence of output distortions in the economy the monetary authority has an incentive to renege on earlier promises to maintain price stability by expanding the money supply in order to create unexpected inflation thereby increasing output and employment since private wage setters form expectations rationally this policy action is anticipated and in equilibrium leads to excessive inflation without any resulting change in output or employment consequently in the absence of enforceable policy rules the time consistent discretionary monetary path produces a socially sub optimal inflation rate this form of policy behavior has important implications for the decisions of private agents such as their choice of the degree of wage indexation however most work in the literature on endogenous wage indexation stemming from the seminal paper by gray 10 has analyzed the equilibrium indexation choice assuming either a constant money growth rule 1 or a monetary rule involving lagged or contemporaneous feedback 8 17 only the recent papers by devereux 5 6 have attempted to examine the implications of time consistent discretionary monetary policy for endogenous wage indexation the informational structure he considers has the monetary authority setting the money stock prior to the realization of shocks so that the authority has no information regarding current period disturbances when determining its course of action this assumption precludes any contemporaneous attempt by the monetary authority to stabilize output or the price level devereux reaches the conclusion that wage setters who are aware of the authority s policy decision will find it optimal to index positively to unanticipated price level surprises since none of the aggregate shocks are offset directly by the monetary authority thus the informational environment confronting the authority influences the degree of indexation and subsequently the manner in which aggregate demand and supply variability impinge upon social welfare

a positive theory of inflation and inflation variance a positive theory of inflation and inflation variance empirically inflation and the variance of inflation are positively associated this paper develops a model that provides a potential explanation for this relationship in terms of the incentives facing the policymaker in a discretionary equilibrium the model can also account for an empirical association between inflation and measures of real output instability there is however no direct causal link whatever from the average rate of inflation to either the variance of inflation or that of real output i introduction the debate over the use rules or discretion in monetary policy has been central to macroeconomics for many years e g simons 1963 lucas 1980 buiter 1980 recently kydland and prescott 1977 and barro and gordon 1983a b have identified discretion as the absence of policy commitment in a game between policymakers and the public they argued that discretionary policymaking will lead governments to create excessive inflation a policy of low inflation is not consistent with incentives facing governments and thus will not be believed by the private sector barro and gordon 1983a argue that this positive theory of monetary policy can help to explain many features of the trend rate of inflation in modern economies high and persistent rates of inflation a positive relationship between inflation and unemployment and the observed countercyclical behaviour of monetary authorities among others these models are based on the premise that there are significant costs to a high but fully anticipated rate of inflation another feature of inflation in modern economics however is the well documented fact that inflation and the variability of inflation are positively associated this phenomenon has been widely observed over different countries at different times 1 this has led researchers to question the feasibility of a steady and predictable positive rate of inflation the finding suggests that high rates of inflation may reduce the ability to forecast future inflation rates a high average inflation rate may add an unnecessary degree of uncertainty to individual decision making and lead to a misallocation of resources friedman 1977 suggests that this may cause output instability and possibly raise the average unemployed rate a related paper by logue and sweeney 1981 establishes that there is a positive relationship between inflation and the variability of economic growth for industrial countries given this perspective the welfare costs associated with inflation might be considerably higher than the traditional costs of anticipated inflation this paper extends the barro and gordon 1983a model of discretionary monetary policy to take account of the relationship between inflation and measures of inflation and output variability the extension focussed on is to model an endogenous wage indexing scheme in the labor market in the discretionary equilibrium wage setters not only form rational expectations of the future price level but also choose an optimal degree of wage indexation this extension to the basic model has the following properties of a discretionary equilibrium 1 there is a positive association between the mean rate of inflation and the magnitude of real disturbances in the economy as well as between the mean inflation rate and the degree of output instability in the economy 2 in an economy where real disturbances are relatively important there is a positive association between the mean rate of inflation and the variance of inflation the explanation behind these results is as follows the lower is the degree of wage indexation the greater is the incentive for monetary authorities to cause surprise inflation and hence the higher is the mean rate of inflation in a discretionary equilibrium but the degree of wage indexation is negatively related to the variance of real disturbances in an economy which is subject to both real and nominal disturbances

the pricing behavior of italian gas stations some evidence from the cuneo retail fuel market abstract this paper studies how gas stations adjust their gasoline and diesel prices in response to their neighboring competitors the empirical analysis relies on data collected from january to august 2011 on the daily prices of 20 gas stations located in cuneo italy these data show significant price uniformity especially within the same geographical area of the town approximately one third of gas stations responded within a day to targeted competitors price changes indicating some evidence of price matching behavior in the industry additionally there is some but discontinuous geographical price propagation testifying to the presence of a weak domino effect finally spatial econometric analysis suggests that there is spatial dependence between gas stations up to about 1 1 km

financial planning where the firm s demand for funds is nonstationary and stochastic the incentive for a firm to engage in planning prearranging for its future financing derives from the interaction of uncertainty concerning the amount and timing of future needs and the cost of negotiating and terminating contracts in capital markets three conditions on relative costs and probability distributions are identified under which no financial slack should be raised if those conditions are not met then under one set of reasonable assumptions the optimum amount of slack will be more than the largest possible future need the model allows for surprises which can cause upward or downward in contrast to eoq models revisions in the future regarding the optimal level of slack to continue to carry

the effect of monetary variability on welfare in a simple macroeconomic model abstract in many rational expectations macro models monetary variability reduces welfare this note provides a counterexample based on an extension of the discretionary equilibrium of barro and gordon 1983 to an economy with endogenous wage indexing greater monetary variability leads to greater wage indexing this lowers the authority s perceived return to discretionary monetary policy and thereby lowers the equilibrium rate of inflation the implication is that over a certain interval monetary variability may increase welfare

forward market equilibrium economists have long been interested in the functioning of forward futures markets keynes and hicks were the first to write persuasively in support of the theory of normal backwardation this theory says the futures price is biased downward relative to the expected future spot price as a means of compensating speculators for taking long futures positions 12 8 in this theory speculators are viewed as providing insurance to hedgers who desire to take short futures positions to reduce the riskiness of their commodity holdings in addition to normal backwardation there are theories of unbiasedness and normal contango the unbiasedness theory says that the futures price equals the expected spot price while the normal contango theory says that the futures price exceeds the expected spot price 4 19 21 however the controversy over the three theories has not been entirely resolved it has been suggested 4 19 that each of the three theories could be applicable at various points during the planting harvesting processing cycle of a crop as the net hedging demand shifts from a large number of hedgers who desire to be short in the futures market to a large number of individuals who are long hedgers nonetheless the traditional theories of futures markets have been criticized because they are not grounded in a general equilibrium model where participants tastes endowments and beliefs interact so as to generate a market equilibrium incorporating both speculative and non speculative transactions 9 it is the purpose of this paper to provide a framework within which normal contango normal backwardation and unbiasedness can each occur for commodities which have certain well specified characteristics independent of the relative numbers of participants on each side of the futures market in the spirit of 9 we consider the major source of uncertainty to be technological in nature quantity risk and argue that the commonly used definitions of hedger one who sells forward some fraction of his crop yield and speculator are not very useful for economic analysis instead the more generally applicable concept of hedger as one who trades mean income for reductions in risk in the rothschild stiglitz sense 17 is supported because it

vancouver s gasoline price wars an empirical exercise in uncovering supergame strategies this paper uses a unique data set to determine which dynamic model of tacit collusion best describes behaviour in a particular industry the area investigated is a region of the vancouver british columbia retail gasoline market players are service station managers who compete daily firms choose price in each period using strategies that depend on prices chosen in the previous period periodically unanticipated demand shocks precipitate price wars when shocks occur the firms in the market must determine the new demand conditions and adjust their strategies from an econometric point of view slopes of intertemporal reaction functions are latent variables the resulting system of equations with time varying parameters is estimated via the kalman filter different repeated game oligopoly models correspond to different transition matrices for the latent variables the models can thus be assessed in terms of their power to explain firm behaviour in this market

indexation and incomes policy a study of wage adjustment in unionized manufacturing data from nearly 200 collective bargaining units are used to study the frequency of wage change from 1957 to 1978 it is shown that incomes policies during the kennedy johnson and nixon administrations encouraged changes in the length of time between wage adjustments inflation often thought to be responsible for fluctuations in the coverage of indexing provisions is found to play virtually no role the conclusion is that government intervention in the wageprice process aroused fears that the government will intervene again in the future in the presence of this uncertainty the wage adjustment provisions of collective bargaining contracts were changed

optimal sequential futures trading hedgers adjust their futures market positions to reflect new information therefore the anticipation of new information creates future decision points and thus a multiperiod decision problem previous studies see 2 4 5 7 and 8 which solved the problem of choosing optimal futures market hedges have not addressed this issue rather these studies have derived optimal hedges in one period frameworks in general this solution is incorrect if during the time the hedge is in effect new information is anticipated

inflation and real growth some empirical results what is the relationship between the average rate of inflation and the variability of real economic growth recent studies by gordon 3 okun 7 logue and willett 6 klein 5 and jaffee and kleiman 4 have attempted to f1ll some of the gaps in our knowledge of inflation s effect on the economy these studies have generally demonstrated the positive empirical relationship between the rate of inflation and its variability or unpredictability such heightened uncertainty may produce greater variability of real growth which in turn undoubtedly increases welfare costs using annual data for twenty four countries we elnd a positive relationship between the mean inflation rate and the variability of real economic growth this finding strengthens the commonly held belief that inflation is undesirable on welfare grounds

technological uncertainty and the theory of the firm several recent articles 1 6 have generalized the theory of the firm to incorporate price uncertainty and risk aversion it is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium leland 5 provides a similar generalization given demand uncertainty however in each case the assumption of a well specified technology is maintained this paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm s optimal production decision like the earlier work on the theory of the firm we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium unlike the earlier work we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm s technology we show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior like its predecessors the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision we modify the baron and sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output as a result the entrepreneur s decision yields a random variable denoting output and a linear transformation of it denoting profit the entrepreneur chooses the random variable denoting profit to maximize his expected utility there are at least three distinct ways in which our notion of technological uncertainty may be interpreted first the entrepreneur may not know the location of the production surface in this case each production decision yields a random output an increase in the

basis risk partial takedown and hedging by financial intermediaries in this paper we provide a model of futures market equilibrium in which both financial intermediaries and their customers are able to hedge both quantity and price risk the interplay between alternative loan commitment arrangements and hedging decisions is examined in some detail as an example we show conditions under which futures contracts can be used in conjunction with a particular loan pricing scheme to replicate another pricing mechanism by considering both input and output price uncertainty we argue that due to the built in hedge on their balance sheets the equilibrium hedge ratios for both firms and intermediaries is less than one that is a partial hedge this generalization also allows us to provide counterexamples to some commonly held beliefs concerning futures trading for example that hedgers would always want to avoid basis risk