Wage Contracts, Capital Mobility, and Macroeconomic Policy

Pierre-Richard Agénor

No 1995/010, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; net effect; industrialization policy; home goods sector; home goods market; rate of inflation; opportunity cost; exportable goods; effect of a change; goods price; equilibrium condition of the home goods market; home goods price; firms in the home goods sector; Real exchange rates; Wages; Exports; Consumption; Real wages; Southeast Asia (search for similar items in EconPapers)
Pages: 32
Date: 1995-01-01
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Journal Article: Wage Contracts, Capital Mobility, and Macroeconomic Policy (1998)
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