Designing Indexed Units of Account

No 1179, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: An indexed unit of account is a unit of measurement defined using an index such as a consumer price index so that prices, wages or deferred payments defined in terms of these units will automatically adjust to changing economic conditions. Evidence on money illusion and sticky prices, and evidence from countries (notably Chile) that have created indexed units of account, suggests that creating such indexed units is an important policy option for governments in countries with unstable prices or incomes. Choices for governments designing indexed units of account are discussed. Governments may choose to encourage the use of the units only for large long-deferred non-wage payments, or they may choose to go to the opposite extreme of encouraging the use of the units for defining all prices, wages and payments. A general equilibrium model is given that shows the dynamics of prices when all prices are expressed in the units. Governments may choose to link units to a consumer price index or to a per capita income index, and there may be advantages to creating both kinds of units simultaneously. Downward rigidity of real wages might be reduced if wages are denominated in base-income-indexed units of account, where base income is defined so that the growth rate in money value of the unit is biased down relative to actual per capita income growth. Examples of the units for United States are displayed and discussed. Could add description of simulation, if that is added.

Keywords: Indexation; escalator clause; cost of living allowance (COLA); monetized indexed units of account; base income; money illusion; sticky prices; fairness; unidad de fomento; Chile (search for similar items in EconPapers)
Pages: 23 pages
Date: 1998-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Lawrence R. Klein, ed., Long-run Growth and Short-run Stabilization: Essays in Memory of Albert Ando, Elgar, 2006, pp. 288-302

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d11/d1179.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Chapter: Designing Indexed Units of Account (2006)
Working Paper: Designing Indexed Units of Account (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1179

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().