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Wage Flexibility and Openness

Joshua Aizenman^1,2

¹ National Bureau of Economic Research · ² University of Chicago

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.

DOI

10.2307/1885396

Volume

100 (2)

Pages

539

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