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Wage Contracts, Capital Mobility, and Macroeconomic Policy

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  • Pierre-Richard Agénor

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.

Suggested Citation

  • Pierre-Richard Agénor, 1995. "Wage Contracts, Capital Mobility, and Macroeconomic Policy," IMF Working Papers 1995/010, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1995/010
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