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Exchange Rates and Wages in an Integrated World

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  • Prachi Mishra
  • Antonio Spilimbergo
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    Abstract

    We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981-2005, we find that the elasticity of domestic wages to real exchange rate is 0.15 after a year for countries with high barriers to external labor mobility, but about 0.40 in countries with low barriers to mobility. The result is robust to the inclusion of various controls, different measures of exchange rates, and definitions of labor market integration. These findings call for including labor mobility in macro models of external adjustment. (JEL F16, F31, J31)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

    Volume (Year): 3 (2011)
    Issue (Month): 4 (October)
    Pages: 53-84

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    Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:53-84

    Note: DOI: 10.1257/mac.3.4.53
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    1. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026203316x, December.
    2. Bouton, Lawrence & Paul, Saumik & Tiongson, Erwin R., 2011. "The impact of emigration on source country wages : evidence from the Republic of Moldova," Policy Research Working Paper Series 5764, The World Bank.
    3. José Manuel Campa & Linda S. Goldberg, 1999. "Employment versus Wage Adjustment and the U.S. Dollar," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 99-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Burstein, Ariel Tomas & Neves, Joao C & Rebelo, Sérgio, 2001. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2944, C.E.P.R. Discussion Papers.
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