Wage Indexation and Exchange Market Interventions in a Small Open Economy
AbstractThe analysis of this paper stresses the interdependence between wage indexation on the one hand, and exchange market intervention on the other,as tools of'macroeconomic stabilization policy in a small open economy subject to stochastic disturbances. It is shown how the choice of eitherpolicy instrument impinges on the effectiveness of the other. In particular,if the domestic money wage is fully indexed to some weighted average of the domestic and foreign price levels, then irrespective of what that chosen weight may be, exchange market intervention is rendered totally ineffective insofar as the stabilization of the real part of the domestic economy is concerned. Likewise, if the monetary authority intervenes in the exchange market so as to exactly accommodate for nominal movements in the demand for money, thereby rendering the excess demand for money dependent only upon real variables, then any form of wage indexation is totally ineffective for the stabilization of the real part of the system. In either polar case, the respective instrument can stabilize the domestic price level. Alternative combinations of policy for the stabilization for domestic and foreign disturbances are considered.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 16 (1983)
Issue (Month): 4 (November)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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Other versions of this item:
- Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Intervention in a Small Open Economy," NBER Working Papers 1170, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
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- Robert P. Flood & Nancy Peregrim Marion, 1980.
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0500, National Bureau of Economic Research, Inc.
- Flood, Robert P & Marion, Nancy Peregrim, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 43-66, February.
- Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 282-92, April.
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