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Exchange Rates and Wages in an Integrated World

  • Prachi Mishra
  • Antonio Spilimbergo

We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981-2005, we find that the elasticity of domestic wages to real exchange rate is 0.15 after a year for countries with high barriers to external labor mobility, but about 0.40 in countries with low barriers to mobility. The result is robust to the inclusion of various controls, different measures of exchange rates, and definitions of labor market integration. These findings call for including labor mobility in macro models of external adjustment. (JEL F16, F31, J31)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 4 (October)
Pages: 53-84

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:4:p:53-84
Note: DOI: 10.1257/mac.3.4.53
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  2. Gordon H. Hanson & Antonio Spilimbergo, 1996. "Illegal Immigration, Border Enforcement, and Relative Wages: Evidence from Apprehensions at the U.S.-Mexico Border," Research Department Publications 4036, Inter-American Development Bank, Research Department.
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  13. Kevin A. Hassett & Aparna Mathur, 2006. "Taxes and Wages," Working Papers 49824, American Enterprise Institute.
  14. Kaivan Munshi, 2003. "Networks In The Modern Economy: Mexican Migrants In The U.S. Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 549-599, May.
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