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Implications of economic interdependence and exchange rate policy on endogenous wage indexation decisions


  • Jay H. Bryson
  • Chih-Huan Chen
  • David D. VanHoose


This paper shows how economic interdependence affects wage indexation decisions when monetary authorities do not observe stochastic disturbances. Under a managed exchange rate, atomistic wage setters in interdependent nations will choose the same degree of indexation as they would in a small open economy. Under a flexible exchange rate, the likelihood rises that they will choose a lower degree of indexation than their counterparts in a small open economy as the degree of interdependence rises, as the variance of money demand shocks rise relative to supply shocks, and as supply curves steepen. Finally, wage indexation choices are more likely to be strategic complements as the degree of interdependence rises and as the variance of money demand shocks rises relative to supply shocks.

Suggested Citation

  • Jay H. Bryson & Chih-Huan Chen & David D. VanHoose, 1996. "Implications of economic interdependence and exchange rate policy on endogenous wage indexation decisions," International Finance Discussion Papers 571, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:571

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    References listed on IDEAS

    1. Pearce, Douglas K & Roley, V Vance, 1985. "Stock Prices and Economic News," The Journal of Business, University of Chicago Press, vol. 58(1), pages 49-67, January.
    2. Ghosh, Sucharita & Lien, Donald, 1995. "Data Revision and Market Response: The Case of United States Trade Balance Announcements," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(2), pages 265-275, May.
    3. Becker, Kent G & Finnerty, Joseph E & Kopecky, Kenneth J, 1995. "Domestic macroeconomic news and foreign interest rates," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 763-783, December.
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