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Implications of economic interdependence and exchange rate policy on endogenous wage indexation decisions

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Author Info

  • Jay H. Bryson
  • Chih-Huan Chen
  • David D. VanHoose

Abstract

This paper shows how economic interdependence affects wage indexation decisions when monetary authorities do not observe stochastic disturbances. Under a managed exchange rate, atomistic wage setters in interdependent nations will choose the same degree of indexation as they would in a small open economy. Under a flexible exchange rate, the likelihood rises that they will choose a lower degree of indexation than their counterparts in a small open economy as the degree of interdependence rises, as the variance of money demand shocks rise relative to supply shocks, and as supply curves steepen. Finally, wage indexation choices are more likely to be strategic complements as the degree of interdependence rises and as the variance of money demand shocks rises relative to supply shocks.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/571/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/571/ifdp571.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 571.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:571

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Related research

Keywords: Foreign exchange rates ; Indexation (Economics);

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