Wage Flexibility and Openness
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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Volume (Year): 100 (1985)
Issue (Month): 2 (May)
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References listed on IDEAS
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- Frenkel, Jacob A. & Aizenman, Joshua, 1982.
"Aspects of the optimal management of exchange rates,"
Journal of International Economics,
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- Jacob A. Frenkel & Joshua Aizenman, 1983. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.
- Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-77, September.
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- Richard C. Marston, 1981. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc.
- Rudiger Dornbusch, 1981.
"Real Interest Rates, Home Goods, and Optimal External Borrowing,"
NBER Working Papers
0779, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
- Flood, Robert P & Marion, Nancy Peregrim, 1982.
"The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing,"
The Quarterly Journal of Economics,
MIT Press, vol. 97(1), pages 43-66, February.
- Robert P. Flood & Nancy Peregrim Marion, 1980. "The Transmission of Disturbances under Alternative Exchange-Rate Regimeswith Optimal Indexing," NBER Working Papers 0500, National Bureau of Economic Research, Inc.
- Brunner, Karl & Meltzer, Allan H., 1977. "Stabilization of the domestic and international economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 1-6, January.
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