Wages, relative Prices and the Choice Between Fixed and Flexible Exchange Rates
AbstractHow much difference a flexible exchange rate makes to the economic performance of a country depends significantly on wage behaviour. If wages are sufficiently sensitive to exchange rates, flexible rates will exhibit much the same variability of output as a fixed exchange rate regime. Foreign wage behaviour is also of key importance, since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behaviour, while for other economic disturbances it is the relative degree of wage flexibility that determines the desirability of flexible rates. This paper reexamines the choice between fixed and flexible rates taking into account both domestic and foreign wage behaviour. Wage behaviour is important to the choice between exchange rate regimes because it determines to what extent a change in the exchange rate also changes the relative prices of foreigh and domestic goods. It is primarily through changes in relative prices that exchange rates affect domestic output and employment. Traditional treatments of fixed and flexible exchange rates, of which Mundell's Canadian Journal study (1963) is the best known, assumed that any change in the exchange rate resulted in an equal change in relative prices because both wages and domestic prices were assumed constant. When wages are responsive to changes in the general price level, however, domestic prices respond indirectly to changes in exchange rates, with correspondingly less effect on relative prices. In such circumstances, as shown earlier by Sachs (1980), changes in exchange rates lead to relatively small changes in real output and employment.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 202.
Length: 26 pages
Date of creation: 1981
Date of revision:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helen Neal).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.