Working Paper: NBER ID: w1108
Authors: Joshua Aizenman
Abstract: 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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more closed economy (P19) | lower degree of optimal wage indexation (J38) |
| lower degree of optimal wage indexation (J38) | less output fluctuation around its desired level (E32) |
| more open economy (F43) | smaller output shock from unexpected monetary shock (E19) |
| more closed economy (P19) | smaller output shock from given real shock (E19) |
| endogenous adjustment of relative prices (F16) | mitigates effects of real interest rate shocks (E43) |
| increased openness (O36) | enhances optimal wage indexation (J38) |
| enhanced optimal wage indexation (J38) | increases real wage rigidity (J39) |
| ratio of productivity variance to variance of other shocks (O49) | degree of wage indexation (J38) |