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International Adjustment with Wage Rigidity

In: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics

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  • William H. Branson
  • Julio J. Rotemberg

Abstract

Two of the puzzling macroeconomic phenomena of the 1970s have been the persistent stagnation in Europe, and the disagreement between the U.S. and Europe on the feasibility of recovery by demand expansion. This paper develops the hypothesis that the source of both the stagnation and the policy differences is money-wage stickiness in the U.S. and real-wage stickiness in Europe and Japan. A real wage which is sticky above its equilibrium level in Europe and Japan would account for stagnation and infeasibility of recovery by demand expansion. The theoretical models are developed in both the one-commodity and two-commodity-bundle cases. The empirical results confirm that in the U.S. the nominal wage adjusts slowly toward equilibrium, while in Germany, Italy, Japan, and the U.K. the real wage adjusts slowly.

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This chapter was published in:

  • Georges de Ménil & Robert J. Gordon, 1991. "International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number de_m91-2, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11675.

    Handle: RePEc:nbr:nberch:11675

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