THE RECENT SURGE OF PRICE MOVEMENT, coupled with a fairly substantial recession, has interested economists in alternative adjustments to chronic price inflation. By traditional neoclassical theory, increases in excess capacity would prove sufficient to dampen excess demand and reduce the rate of change in observed prices (perhaps about its expected path). This remedy, however, has proved to be both costly, as measured by the lost output during transition, and time consuming, as evidenced by the rather slow decrease in price movement over the recent slowdown. Consequently, there has been increased interest in alternative ways of "living with" inflation rather than ridding the system of it. One of these ways, proposed by Milton Friedman [10, 11], is a general system of indexation of nominal contracts to actual inflation rates, which, it is believed, would diminish the pains of inflation associated with imprecise estimates incorporated in contract negotiations. Bargaining could, thus, center around real changes such as productivity or relative price movements . Therefore, the burden of inflation would be reduced and the economy would more rapidly attain its new equilibrium after a disturbance. However, Friedman's reintroduction of indexation into the economic arena has not met with unequivocal support. Some have contended that the proposed remedy need not be universally optimal, and others question whether it may even be undesirable. Representing the first group, Gray [ 15] questions the general optimality