This paper considers a multi-sector economy subject to exogenous demand shocks that alter the equilibrium structure of relative prices and relative wages. Contracts set nominal wages in advance of the realization of stochastic shocks. Formulae for optimal sectorial wages - indexation rules are provided. These optimal rules alter the absolute and the relative structure of sectorial nominal wages. The rules depend on the heterogeneity of the skill distribution. The effects of shocks on the real exchange rate and on real wages are determined and the limited role of second-best nominal exchange rate policy is analyzed.
ASJC Scopus subject areas
- Economics and Econometrics