Wage Contracts, Capital Mobility, and Macroeconomic Policy
Summary:
This paper examines the long-run effects of macroeconomic policy shocks on the behavior of output, inflation, real wages and the real exchange rate in a small open economy. The analysis is based on a two-sector, three-good optimizing model with imperfect capital mobility, nominal wage contracts with backward- or forward-looking price expectations, and endogenous mark-up pricing in the nontraded goods sector. The effects of a cut in government spending on nontraded goods are shown to be independent of the expectational mechanism embedded in wage contracts. A reduction in the nominal devaluation rate lowers steady-state output in the tradable sector under backward-looking contracts, but exerts an expansionary effect under forward-looking contracts.
Series:
Working Paper No. 1995/010
Subject:
Consumption Exports Foreign exchange International trade Labor National accounts Real exchange rates Real wages Wages
English
Publication Date:
January 1, 1995
ISBN/ISSN:
9781451842647/1018-5941
Stock No:
WPIEA0101995
Pages:
32
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