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.
|Date of creation:||Apr 1983|
|Publication status:||published as Aizenman, Joshua. "Wage Flexibility and Opnness." Quarterly Journal of Economics, Vol. 100, (1985), pp. 539-550.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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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.
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- Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, vol. 13(3-4), pages 231-256, November.
- Jacob A. Frenkel & Joshua Aizenman, 1981. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.