International adjustment with wage rigidity
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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- Branson, William H & Klevorick, Alvin K, 1969. "Money Illusion and the Aggregate Consumption Function," American Economic Review, American Economic Association, vol. 59(5), pages 832-49, December.
- Michael Bruno & Jeffrey Sachs, 1979. "Supply vs. Demand Approaches to the Problem of Stagflation," NBER Working Papers 0382, National Bureau of Economic Research, Inc.
- Avinash Dixit, 1978. "The Balance of Trade in a Model of Temporary Equilibrium with Rationing," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 393-404.
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