Optimal Exchange Rate Policy, Wage Bargaining, and Foreign Direct Investment
This paper develops a game where the government pursues an optimal monetary policy, monopolistic trade unions set nominal wages, and firms (domestic and multinationals) choose the levels of employment and output in the economy. Employment, output, and nominal wages are affected by the nominal exchange rate, which is set by the government according to two different regimes. The government can fix the exchange rate or let it float freely when pursuing an optimal monetary policy consisting of minimizing a usual inflation-growth loss function. If instead the government maximizes a national welfare function, it has incentives to exploit the short-run positive impact of a currency depreciation on wages, employment and output.
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Volume (Year): 56 (2003)
Issue (Month): 1 ()
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