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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.
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Suggested Citation

  • Joshua Aizenman, 1985. "Wage Flexibility and Openness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 539-550.
    • Handle: RePEc:oup:qjecon:v:100:y:1985:i:2:p:539-550.
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    File URL: http://hdl.handle.net/10.2307/1885396
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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, June.
    3. Lassila, Jukka, . "Essays on Taxes and Wage Formation," ETLA A, The Research Institute of the Finnish Economy, number 32, June.
    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. 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.
    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. Aizenman, Joshua, 1985. "Openness, relative prices, and macro-policies," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 5-17, March.

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