Wage Indexation, Flexible Exchange Rates, and Macro-Economic Policy

Abstract

After five years of floating exchange rates, the implications of flexible rates for countercyclical macroeconomic policies remain in doubt. Most neoclassical models exchange rate dynamics speak only indirectly to the issue the countercyclical policies, for the models are characterized by downward flexible prices and full employment equilbria. The prescriptions of standard Keynesian models, on the other hand, warrant scepticism. The Mundell-Fleming models, for example, suffects that expansionary monetary policy, by inducing a real exchange-rate depreciation, is effective in raising output in small, underemployed economy. The facts seem otherwise. In Italy, Great Britain, and other OECD countries expansionary monetary policies do not seem to have provided much real economic stimulus. In these countries, nominal money growth and depreciations have been followed by compensating increases in domestic wages and prices. Shifts in the real terms of trade between competitors have been blocked. Thus, the IMF notes "As a consequence of offsetting price and exchange rate developments, the parttern of competitiveness among most of the major industrial countries is not very similar to what it was early in 1973."

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 25 citations exist upstream.