This paper investigates an economy in which there are short-term wage contracts that are re-negotiated under certain conditions. The paper determines the optimal frequency of wage re-negotiation and shows that it depends positively on measures of aggregate variability and Phillips curve slope. The role of optimal wage re-negotiation is to mitigate the output effects of various shocks. In the context of an open economy, it is shown that the desirable exchange rate regime in an economy with optimal wage re-negotiation depends on the stochastic structure of the economy.
ASJC Scopus subject areas
- Economics and Econometrics