Implications of Economic Interdependence and Exchange Rate Policy on Endogenous Wage Indexation Decisions

28 Pages Posted: 14 Nov 1996

See all articles by Jay H. Bryson

Jay H. Bryson

affiliation not provided to SSRN

Chih-Huan Chen

Feng Chia University - Department of Economics

David D. VanHoose

Baylor University - Department of Economics

Date Written: October 1996

Abstract

This paper shows how economic interdependence affects wage indexation decisions when monetary authorities do not observe stochastic disturbances. Under a managed exchange rate, atomistic wage setters in interdependent nations will choose the same degree of indexation as they would in a small open economy. Under a flexible exchange rate, the likelihood rises that they will choose a lower degree of indexation than their counterparts in a small open economy as the degree of interdependence rises, as the variance of money demand shocks rise relative to supply shocks, and as supply curves steepen. Finally, wage indexation choices are more likely to be strategic complements as the degree of interdependence rises and as the variance of money demand shocks rises relative to supply shocks.

JEL Classification: F41

Suggested Citation

Bryson, Jay H. and Chen, Chih-Huan and VanHoose, David D., Implications of Economic Interdependence and Exchange Rate Policy on Endogenous Wage Indexation Decisions (October 1996). Board of Governors of the Federal Reserve System International Finance Disc. Paper 571. Available at SSRN: https://ssrn.com/abstract=1685 or http://dx.doi.org/10.2139/ssrn.1685

Jay H. Bryson (Contact Author)

affiliation not provided to SSRN

Chih-Huan Chen

Feng Chia University - Department of Economics ( email )

100, WenHwa Rd
Talchung
Taiwan, ROC
886-4-4517250-4490 (Phone)

David D. VanHoose

Baylor University - Department of Economics ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States

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