Indexation, national consent, and collective bargaining agreements

Abstract

Indexation of financial liabilities was introduced in Iceland in face of an almost total collapse of the islands monetary system. The demise of the financial system was caused by long lasting and high episode of price inflation in the late 1960’s and the 1970’s. The article traces some of the negative consequences of inflation for the economy. The paper also presents a theoretical setting where a simple game-theoritical model is used to explain how the invention of indexation of financial liabilities changed the landscape of collective bargaining. Before the invention of indexation the actors in the bargaining game were more likely to gain from inflation compared to a situation with stable prices. Indexation changed that slowly but steadily. Indexation has thus been an stabilizing institution in Icelandic economic live.