Affordable Access

Wage Indexation, Supply Shocks, and Monetary Policy in a Small, Open Economy

Authors
Disciplines
  • Design
  • Economics

Abstract

Wage Indexation, Supply Shocks, and Monetary Policy in a Small, Open Economy This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Economic Adjustment and Exchange Rates in Developing Countries Volume Author/Editor: Sebastian Edwards and Liaquat Ahamed, eds. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-18469-2 Volume URL: http://www.nber.org/books/edwa86-1 Publication Date: 1986 Chapter Title: Wage Indexation, Supply Shocks, and Monetary Policy in a Small, Open Economy Chapter Author: Joshua Aizenman, Jacob Frenkel Chapter URL: http://www.nber.org/chapters/c7671 Chapter pages in book: (p. 89 - 142) 3 Wage Indexation, Supply Shocks, and Monetary Policy in a Small, Open Economy Joshua Aizenman and Jacob A. Frenkel 3.1 Introduction The energy crises of the 1970s stimulated a renewed interest in ques- tions concerning the proper adjustment to external supply shocks. In general, restoring equilibrium in response to shocks necessitates the adjustment of both quantities and prices. When applied to labor mar- kets, various proposals for policy rules attempting to restore labor market equilibrium may be classified in terms of their impact on the division of adjustment between quantities (the level of employment) and prices (the real wage). The design of optimal policies provides for the appropriate division of this adjustment. This paper develops a unified framework for the analysis of wage indexation and monetary policy. The analytical framework is then ap- plied to determine the optimal policy rules in the presence of supply shocks, as well as to evaluate the welfare consequences and ranking of alternative (suboptimal) policy rules. To set the stage for an evalu- ation of the welfare implications of alternative policy rules, we first analyze two extreme cases: a rule that stabilizes employment, and a rule that stabilizes the real wage. The analysis of these two extr

There are no comments yet on this publication. Be the first to share your thoughts.