Wage Contracts, Capital Mobility, and Macroeconomic Policy

32 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: January 1995

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.

JEL Classification: E43, E62, F41

Suggested Citation

Agenor, Pierre-Richard, Wage Contracts, Capital Mobility, and Macroeconomic Policy (January 1995). IMF Working Paper, Vol. , pp. 1-29, 1995. Available at SSRN: https://ssrn.com/abstract=883160

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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