Monopolistic Competition and Labor Market Adjustment in the Open Economy
In: Misalignment of Exchange Rates: Effects on Trade and Industry
This paper explains prices, output and employment adjustment In an open economy characterized by a monopolistic competitive market structure where goods prices are flexible while wages are determined by contracts that pre-set the wage path for several periods. The paper solves the rational expectation equilibrium in an economy characterized by staggered, unsynchronized wage negotiation, for which the degree of contract staggering IS endogenously determined. It investigates the adjustment of output, exchange rate and prices to nominal and real shocks, and to what extent that adjustment depends on the market power enjoyed by each producer and the substitutability between domestic and foreign goods. It also studies the potential role of indexation clauses, like wage indexation to nominal income. The analysis shows that unexpected monetary shocks can generate persistent aggregate output and relative price shocks, whose nature is determined by the degree of substitutability between domestic and foreign goods. Greater substitutability induces a greater output and employment effects and smaller prices effects in the short and the Intermediate run. On the other hand, greater substitutability is shown to reduce the persistency and duration of the adjustment. If the income elasticity of the demand for money is less than unity the presence of nominal wage contracts tends to magnify the responsiveness of the economy to real shocks, and a larger degree of substitutability will magnify the short-run and the intermediate-run adjustment of prices and output to real shocks, and will reduce the needed adjustment of relative prices.
(This abstract was borrowed from another version of this item.)
|This chapter was published in: ||This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number
8058.||Handle:|| RePEc:nbr:nberch:8058||Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephen J. Turnovsky, 1983.
"Wage Indexation and Exchange Market Intervention in a Small Open Economy,"
NBER Working Papers
1170, National Bureau of Economic Research, Inc.
- Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Interventions in a Small Open Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 574-92, November.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:8058. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.