NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Wage Flexibility and Openness

Joshua Aizenman

NBER Working Paper No. 1108 (Also Reprint No. r0691)
Issued in April 1983
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w1108

Published: Aizenman, Joshua. "Wage Flexibility and Opnness." Quarterly Journal of Economics, Vol. 100, (1985), pp. 539-550.

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