The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing

Flood, Robert P.; Marion, Nancy Peregrim

doi:10.2307/1882626

Cited by 197 publications

(109 citation statements)

References 11 publications

Supporting

Mentioning

106

Contrasting

Order By: Relevance

“…Of the two forms of indexation studied, domestic price indexation shows advantages over consumer price indexation only in the case of aggregate demand 'For previous analyses of the labor market emphasizing this difference between the two real wages, see Salop (1974), Purvis (1979), Sachs (1980), Flood andMarion (1982), andMarston (1982).…”

Section: Discussionmentioning

confidence: 99%

See 1 more Smart Citation

Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

Marston¹

1982

View full text Add to dashboard Cite

There are two real wages in an open economy producing a product differentiated from those abroad: the nominal wage deflated by the price of the domestic good and by a price index composed of domestic and foreign goods. The producer responds to one real wage, while labor responds to the other.' When the terms of trade change, these two real wages diverge, so that fixing one real wage through indexation still allows the other real wage to vary. The paper will examine the effects of this interplay between the two real wages, since it is a key feature in the macroeconomic adjustment to economic disturbances.One suggestion commonly made is to limit wage indexation agreements to domestic prices alone by tying wages to the GM' deflator rather than the consumer price index.2 The proposal is attractive to many observers because it apparently offers a way of shielding the domestic economy from increases in the prices of imports, whether due to increases in foreign prices or the depreciation of the domestic currency. The paper will examine under what conditions this form of indexation is preferable to the traditional form of indexation to consumer prices. The choice of indexation rule will depend less upon how import prices change than upon how the terms of trade are affected by disturbances.Most previous studies of optimal wage indexation, including those of Gray (1976) and Fischer (1977b), have confined their analyses to closed -2--economies.3 The basic conclusions about indexation in such economies can be summarized as follows: monetary or aggregate demand disturbances call for full wage indexation since fixing real wages prevents output from

show abstract

Section: Discussionmentioning

confidence: 99%

“…(Flood and Marion (1982) one, g > 1 -a -ga, a condition discussed below in connection with productivity disturbances; the expression must be positive (i.e., domestic price indexation is preferred) if the labor supply elasticity is less than or equal to one, n1.…”

Section: Discussionmentioning

confidence: 99%

Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

Marston¹

1982

View full text Add to dashboard Cite

show abstract

“…Aoki's method permits us (i) to decompose the system into averages and differences of the relevant variables 11 and (ii) to calculate the impact of a shock on a 6 The supply of labour is assumed to be an increasing function of real wages. 7 See Gray (1976), Fischer (1977), Sachs (1980), Flood and Marion (1982), Turnovsky (1983), Aizenman and Frenkel (1985,1986) and Devereux (1988) for studies of wage indexation behaviour. 8 In equilibrium analysis a positive (negative) money supply disturbance is equivalent to a negative (positive) money demand disturbance.…”

Section: Iib Solving the Modelmentioning

confidence: 99%

“…A positive demand shock in country i increases its real and nominal output (see (A.I) and (A.3)) 14 . If b > 0, producer prices may fall.…”

Section: Iva Own-country Effectsmentioning

confidence: 99%

The International Transmission of Economic Shocks in a Three-Country World under Mixed Exchange Rates

Läufer¹,

Sundararajan²

1997

Studies in International Economics and Institutions

View full text Add to dashboard Cite

Suggested Citation: Läufer, Nikolaus K. A.; Sundararajan, Srinivasa (1994) : The international transmission of economic shocks in a three-country world under mixed exchange rates, Diskussionsbeiträge: Serie II, Sonderforschungsbereich 178 "Internationalisierung der Wirtschaft", Universität Konstanz, No. 216 AbstractThe international transmission of economic disturbances is analysed in a three-country world where two countries have no macroeconomic impact on a third country but are large enough to influence each other under a system of mixed exchange rates -a system that combines the fixed exchange rates (FERs) among two EC member countries (Germany and France) and the flexible exchange rates (FLERs) towards a third country, the rest of the world (USA). We find that a positive output demand shock originating in Germany or France has a positive effect on domestic output, but, due to a special third country effect, is likely to produce a contractionary impact on foreign output (negative transmission) while the total effect on the world economy is expansionary. Money supply shocks in either Germany or France have identical effects on the output of the two countries. The FLER component of the MER regime serves as. an important tool for dampening the impact of US shocks on the output of the EC.

show abstract

“…Hamada and Sakurai (1978), Flood (1979), Flood and Marion (1982), Aizenman and Frenkel (1985), Glick andWihlborg (1990), Hodrick (1989), Weber (1981), Artis and Currie (1981) and Fukuda and Hamada (1987), all extend Mundell's framework to include roles for expectations. Artis and Currie (1981) and Fukuda and Hamada (1987) find that both output and prices are stabilized under fixed rates with "velocity shocks", and destabilized with "demand shocks", and that the choice between regimes rests on which of these types of shocks is more important.…”

Section: Introductionmentioning

confidence: 99%

A risk allocation approach to optimal exchange rate policy

Mundaca¹,

Strand²

2005

Oxford Economic Papers

View full text Add to dashboard Cite

We derive the optimal exchange rate policy for a small open economy subject to terms-oftrade shocks. Firm owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to allocate risk between workers and owners. With less risk-averse firms, and greater difference in risk aversion between workers and firms, the optimal exchange rate should vary little with pure terms-of-trade shocks but more with general shocks to prices. Optimal exchange rate variation is greater with indexed wages, but is smaller when firms behave monopolistically and when wage taxes (profit taxes) change procyclically (countercyclically) with export prices (import prices). The model gives policy rules for determining optimal variations of the exchange rate, and indicates when it is, and is not, optimal to join a currency union with trading partners, implying zero exchange rate variation.JEL Code: F31, F33, F41.

show abstract

The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing

Cited by 197 publications

References 11 publications

Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

Real Wages and the Terms of Trade: Alternative Indexation Rules for an Open Economy

The International Transmission of Economic Shocks in a Three-Country World under Mixed Exchange Rates

A risk allocation approach to optimal exchange rate policy

Contact Info

Product

Resources

About