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Wage Flexibility and Openness

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  • Joshua Aizenman

Abstract

This paper analyzes the degree of short-run, real wage flexibility in a two-sector economy under floating rates. This is done by deriving optimal wage indexation in a contracting framework. We find that the more closed the economy, the lower the degree of wage indexation. As a result, output will fluctuate less around its desired level in a more closed economy. These findings further imply that a given unexpected monetary shock will cause as maller output shock in a more open economy, whereas a given real shock will induce a smaller output shock in a more closed economy.

Suggested Citation

  • Joshua Aizenman, 1983. "Wage Flexibility and Openness," NBER Working Papers 1108, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1108
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    References listed on IDEAS

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    1. Richard C. Marston, 1981. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc.
    2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    3. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    5. Brunner, Karl & Meltzer, Allan H., 1977. "Stabilization of the domestic and international economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 1-6, January.
    6. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 43-66.
    7. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, vol. 13(3-4), pages 231-256, November.
    8. Richard C. Marston, 1982. "Wages, Relative Prices and the Choice between Fixed and Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 15(1), pages 87-103, February.
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    Cited by:

    1. Messina, Julian & Strozzi, Chiara & Turunen, Jarkko, 2009. "Real wages over the business cycle: OECD evidence from the time and frequency domains," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1183-1200, June.
    2. Kotilainen, Markku, . "Exchange Rate Unions: A Comparison with Currency Basket and Floating Rate Regimes," ETLA A, The Research Institute of the Finnish Economy, number 21.
    3. Lassila, Jukka, . "Essays on Taxes and Wage Formation," ETLA A, The Research Institute of the Finnish Economy, number 32.
    4. Adrian, Tobias & Gros, Daniel, 2004. "The degree of openness and the cost of fixing exchange rate," Economics Letters, Elsevier, vol. 83(1), pages 141-146, April.
    5. 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.
    6. Aizenman, Joshua, 1985. "Openness, relative prices, and macro-policies," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 5-17, March.
    7. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-423, June.
    8. Joshua Aizenman & Marcelo Selowsky, 1987. "Costly Adjustment and Limited Borrowing: A Welfare Analysis of Policiesto Achieve External Balance," NBER Working Papers 2315, National Bureau of Economic Research, Inc.

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