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Optimal Exchange Rate Policy, Wage Bargaining, and Foreign Direct Investment

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Abstract

This paper develops a game where the government pursues an optimal monetary policy, monopolistic trade unions set nominal wages, and firms (domestic and multinationals) choose the levels of employment and output in the economy. Employment, output, and nominal wages are affected by the nominal exchange rate, which is set by the government according to two different regimes. The government can fix the exchange rate or let it float freely when pursuing an optimal monetary policy consisting of minimizing a usual inflation-growth loss function. If instead the government maximizes a national welfare function, it has incentives to exploit the short-run positive impact of a currency depreciation on wages, employment and output.

Suggested Citation

  • Faria, João Ricardo & de Mello, Luiz, 2003. "Optimal Exchange Rate Policy, Wage Bargaining, and Foreign Direct Investment," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 56(1), pages 1-12.
    • Handle: RePEc:ris:ecoint:0166
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    More about this item

    Keywords

    Exchange rate; wage bargaining; foreign direct investment;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J39 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Other
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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