Implications of economic interdependence for endogenous wage indexation decisions

This paper shows how economic interdependence affects the indexation decisi ons of atomistic wage setters in an environment in which monetary authoriti es do not observe stochastic disturbances before making their policy choice s. If stochastic disturbances are common across countries, interdependence has no effect on equilibrium indexation choices in identical countries. How ever, if disturbances are country specific, numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relativ e to a small open economy. We also show that indexation choices may be eith er strategic complements or strategic substitutes, but that strategic compl ementarity becomes more likely as the degree of interdependence rises.