Box 2 - Economic Effects of Indexation and its Prevalence in Colombia

Automatic price adjustment mechanisms, known as indexing, have mainly been a relatively common practice in developing economies even under different macroeconomic environments.These mechanisms often arise spontaneously in agents' private contracts as a tool to protect themselves from high and unpredictable inflation.However, on other occasions they are the product of regulations resulting from various institutional arrangements.The economic effects of indexing have been a relatively active area of study and a subject of debate.This box presents a brief review of some of the effects of indexing documented in the specialized literature and quantifies the prevalence of its effect on consumer prices in Colombia.