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Discrete exchange rate changes with real wage resistance

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  • Tapio Palokangas

    (University of Tampere, Finland)

Abstract

Fixed exchange rate policy is examined when money wages are determined by collective bargaining for fixed periods. The main results are as follows. If the interest elasticity of aggregate demand is high and the contract periods in the labour market are long, then in the short run, a devaluation produces expansion but in the long run, contraction. Expectations on a future devaluation cause expansion before the occurrence of the devaluation and at the moment of the occurrence, domestic expenditure falls discontinuously.

Suggested Citation

  • Tapio Palokangas, 1992. "Discrete exchange rate changes with real wage resistance," Finnish Economic Papers, Finnish Economic Association, vol. 5(1), pages 38-46, Spring.
  • Handle: RePEc:fep:journl:v:5:y:1992:i:1:p:38-46
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