Working Paper: NBER ID: w1279
Authors: Joshua Aizenman
Abstract: This paper investigates an economy in which there are short-term wage contracts that are re-negotiated under certain conditions. This paper determines the optimal frequency of wage re-negotiation and shows that it depends positively on measures of aggregate variability and Phillips curve slope. The role of optimal wage re-negotiation is to mitigate the output effects of various shocks. In the context of an open economy, it is shown that the desirable exchange rate regime in an economy with optimal wage re-negotiation depends on the stochastic structure of the economy.
Keywords: wage contracts; renegotiation; economic shocks; exchange rate regimes
JEL Codes: E24; E32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate volatility (E10) | frequency of wage renegotiation (J31) |
| frequency of wage renegotiation (J31) | output effects of shocks (F41) |
| labor market pressure (J29) | frequency of wage renegotiation (J31) |
| economic shocks (F69) | choice of exchange rate regime (F33) |
| volatility of foreign prices (F31) | desirability of floating exchange rates (F31) |
| real supply shocks (E39) | desirability of floating exchange rates (F31) |