Wage Flexibility and Openness

Joshua Aizenman

No 1108, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1983-04
Note: ITI IFM
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Published as Aizenman, Joshua. "Wage Flexibility and Opnness." Quarterly Journal of Economics, Vol. 100, (1985), pp. 539-550.

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