Discrete exchange rate changes with real wage resistance

Tapio Palokangas

Finnish Economic Papers, 1992, vol. 5, issue 1, 38-46

Abstract: Fixed exchange rate policy is examined when money wages are determined by collective bargaining for fixed periods. The main results are as follows. If the interest elasticity of aggregate demand is high and the contract periods in the labour market are long, then in the short run, a devaluation produces expansion but in the long run, contraction. Expectations on a future devaluation cause expansion before the occurrence of the devaluation and at the moment of the occurrence, domestic expenditure falls discontinuously.

Date: 1992
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