Research Discussion Paper – RDP 9006 Wage Contracts, Sticky Prices and Exchange Rate Volatility: Evidence from Nine Industrial Countries
November 1990
Abstract
In this paper, I investigate the link between real wage rigidities, nominal wage and price rigidities, and nominal exchange rate volatility. Using a model of overlapping wage contracts and monopolistic price-setting, where prices are costly to change, I find sticky nominal prices and wages to be a feature of all the major industrialised countries. However, I also find real wage rigidities to be absent for most of these countries. In the face of rigidities to nominal wages and prices, flexibility in the real product wage comes about through the dynamics of prices, wages and exchange rates, and the indexation of wages to consumer prices.