Extending the NAWM with a partial indexation mechanism linking wages and trend productivitiy

This document sets out the details for extending the wage Phillips curve of the New Area-Wide Model (NAWM; cf. Christoffel, Coenen and Warne, 2008) with a partial indexation mechanism linking wages to trend productivity developments. The document first outlines the labour-market setting in which households are offering their labour services. It then derives the first-order condition characterising the optimal wage-setting decision of an individual household as well as the law of motion for the aggregate wage index. Finally, the document derives the implied log-linear wage Phillips curve. An appendix provides additional technical details of the derivations.