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Real Wage Flexibility, Economic Fluctuations, and Exchange Rate Regimes

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  • Hyuk Jae Rhee

    (University of Windsor)

  • Jeongseok Song

    (Chung-Ang University)

Abstract

We study the desirability of real wage flexibility and its impact on welfare for each exchange rate regime, using a small open economy model with unemployment fluctuation. The main findings regarding the stabilizing role of real wage flexibilities can be summarized as two-fold. First, the more flexible real wage leads to smaller fluctuation in the output gap, reduces welfare losses regardless of exchange rate regimes. The increase in real wage flexibilities, however, may have destabilizing effects on domestic price and real wage inflation and may have a negative effect on welfare for both exchange rate regimes. Overall, contrary to conventional wisdom, increase in real wage flexibilities may be welfare-reducing. Second, in the presence of real wage rigidities smoothing the exchange rate fluctuations may increase the welfare loss.

Suggested Citation

  • Hyuk Jae Rhee & Jeongseok Song, 2017. "Real Wage Flexibility, Economic Fluctuations, and Exchange Rate Regimes," Open Economies Review, Springer, vol. 28(4), pages 633-659, September.
    • Handle: RePEc:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9438-z
    DOI: 10.1007/s11079-017-9438-z
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    Cited by:

    1. Rhee, Hyuk Jae & Song, Jeongseok, 2020. "Wage rigidities and unemployment fluctuations in a small open economy," Economic Modelling, Elsevier, vol. 88(C), pages 244-262.
    2. Mika Nieminen & Kari Heimonen & Timo Tohmo, 2019. "Current Accounts and Coordination of Wage Bargaining," Open Economies Review, Springer, vol. 30(2), pages 319-341, April.

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    More about this item

    Keywords

    Real wage rigidity; Exchange rate regime; Unemployment; Small open economy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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