Implications of Economic Interdependence and Exchange Rate Policy on Endogenous Wage Indexation Decisions

Board G t F R S In F D P N 5 N 1 IM E IN A E R P EN W I D J B C C a D V N In F D P a p m c st di a c c R p I F Di P ( t ac t t w h h a un m s c w t a a

A T p s h e in a w i d w m au n o s d U a m e r a w s in n w c t s d in t w a s o e U a f e r t li r t t w c a l d i t t c a s o e t d in r t v m d s r r s s a s c s F w i c a m l s c t d i r a t v m d s r r s s

Im E In a E R P E W i D J B C C a D V In A la a o e m o e m t n w a f c a p d H l m co o p s fl n w t e a i f n w in B n w e t e w in po c h i ma i t o w in f m o e h a N o kn t h b e d c e i in ec T r f t m b V ( h s a v b t c e i c a t fr c a d pr T p h t b g T f g e t a e w in f t f a s o e t i ec de t w a d m p b t }T a a re E D I F B G t F R S G S U A P E Un A a g f c a s t h r f D A J D D H G Mi I M P Pe S R a p t M W t Un A A e a o T p r t v t a a s n in r t v t B G t F R S o m i s 2T s w t t w i a G ( a F ( R s w i cl s i F a J ( V a W ( 1 D a V ( B a C ( a Mi ( A w i s o e a p A ( A a F ( F a M ( H ( 1 M ( R ( a Z (

I re st di a w s i e t . a l a m e r w c t s d w i t t w a s o e A f e r w c i w s c d i t g d f t c a s o e Sp t d i r t v m d s r r s s a a s c s b m l t w s in e w c l d w in t t c s o e T s g t p a t s i b in c w s in n d t a w in c u a f e r m e s c st su s co b m l t d in r a t v f m d s r r S s T or t p f A m a s o e a a m in e a p S 2 a r S 4 d t au o p c a S 5 e o w in c S 6 s t r a o s f o A S O E M T di f a s o e ( m t t p t s t g t p d f d t w m 3 S co w i e w e r f (d in l e i d ( i I de a s su w e r f ( i c en d d ( i

3 T m f t g co a f B ( a W a V ( d f a u d o t i i = O i = E f h a p i w w s l i F ( a G ( n w c e f s t b w e t e v t Wa ma w b d w a i d p T s t S m f ( ~ - p + ( Yi = ( y = c - p + ( ( Y~ ~ J ( b z 1b,di Jo ( j =0 ( M-P = y - E; ( p“ + s; l r o f w in p f f l t d p l a r o a w i p r pr s w N ma fu o

4 l t d m s &S r m d s w &. N = l t f p s S l t e r m t u d c p u f c A pa a no c a a i h b s an co E ( t o s f f i d f a E ( t co a s s f t d e w in l t c ( bi < 1 a p p p e i d f i t o E ( a ( d a o a t ag d w i r E ( g t l f in o T m d s g ( w t m d s ( a un w t p d ( B t e a a p t t w m t l o p g ( U t a a f e r t f e c d f ( ( a ( ( Y = ( - [ + 1 + e 1+ - 1+ - ( P = 1 ( + a –b) me - 1+a o 1+@l -b) 1+a(l -b) 1+a(l -b)

5 . . s = - . p” + 1 ( + a -b) me - 1+a e l+a(l -b) ‘ “ 1+a(l -b) 1+a(l -b) w m’ = p“ t e m s U a m f e r r p, a m a e v U t e r a t fo ex c d ( y = c + s - p’) + ( ( P = p* + s (3C) m = [1+U ~ - c - &+ ( A M In E in e di g a p a c e c D f a ~ d o t i i = O i = w f f a di u o t i j = O j = t S m n w c s t b w e t e v t W ma w b d ( w a i t d ( c p i T s t tw m f ( J’i= ~ -p - a -P - ~(l-~)bi(s - ( Se) + ( Y,*= u(1-bj”~)~” - p“’) - ~ - p + ~(l-~)bj”(s - Se) + ( (4C) Y= ot - P - @ - P - o - ( Se) + ( = cx - p - a - p + c - ( Se) + ( Y= ‘y,di y*e 1Yj”dj; fo J0 ( b= 1b,di b“~ 1bj”dj; Jo J0

6 ( f ( m - p = y - E; ( m“ - p“ = y* - ~“; ( Y = S(p” + s -p) + +( f w f v a p p a d w a w a va a d S a w ~ pr c h g w > # ~ r f m d s w . ~ N t t pr s ( w c b c a un w &a s a t d a f m d s a a un w e o T d t s f o A E ( t d in e co ( f a d v W l T s t m d t a w e r r pr U t a a f e r ( ( ( ( a ( c u o ex f y p a T s s so f t n o l a f ( Y = fi + ’ ( + f + ( = 5[ + ’ [ + A + 3 w t ex f ~ a t “ c a g A

7 T d c p i g W= ( + C + s w t f C e Y = ( + C - s A t ( o t p l a e r t p p a e z t s s so f t ante v t C i r a ( y=~ [ - ’ [ - - ~ + ~ - ( U t as a m e r t f e r a c s f y p, p*, a m f G a G ( sp t a m e r r o w t d m au de t u i r f t t e w t f m au c t b e r T a s so f t n o a p l a g A ( Y [ - —’ ( + _ g ( = —’ - & + 4T a t w w c c a f e r ~ U o me t d m a w c t c i r w t f m a w c c i m s k t b e r f t o m b m a c c ac de t e r H a t t p t m au a u c c T e c af e r r

I 8 ( P = + ’ [ + 5 - ( = me- se+ [ - & - * N t t f m d d ( h e o i e c o r a d v t f m a m v t f m s o e t e t f m d s E ( a ( c u g e f t n C i r ( W= + ’ [ + . - ! ( = me- se+ [ - 3 - O M a E R P Re t s t !e t n t g b w s a m au t s A w s m b w a i c b st di a r b a t m au p c a t m a m t p c b t re s s 5T t a f B a G ( D ( a W a V ( a o F e g w d a f o m au s C ( R ( a R ( V a W ( a h i c ac e a a t a a o s di b a m p d a m

9 4 S O E a S t d m a s m t l f ( =( - +~ w E t ex o w ~ t o t w ~ =y+ a w rI = p - p., = T p a p c o d p a f di t t t m a s o ~ t r w t t d m a p a t i o U a f e r t d m a c m m ( t a g ante. S ( a ( i ( di w r m, i m = a s = post, a r y ( P t au o p c U s m i s f f s u a m e r r T s f M( f i t t t i r e r ~ > t t i b m p H n t ~ = 0 b = H n D ( a o g i w t t t ou t s b h c i g n o b t a s d t c a o v f f o ul GU t as t t d m a c c c m = me, ex ante. t c m =Oa t t i b T r t f R f B a G (

10 4 In E U a m e r r t d m a c m m ( =( - +p w t f m a c s m ( L ( “ +p Su ex f ( i ( a ( d ( w r m a ( w r i m = a s = p a s t r ex si y ( A = = C ( f = se= h - C = ( - C w t “ co a g A canbeshown that b = = t m=s= O. Co w t S c c w i e t in b m p U a f e r r t d m a c m m ( w t f m a c m ( o m s c a g

l l w t “ co a g A E A a A A B r t m = =Ow b = b*= Eq I C Re c s e r r a t w s a at Co t s m f l ( =( - j + 1 ( =( f +p# 1 w w s i w m m n e a t f s l f d f t a l f t w s c o a de a o f fu o R t t m au a d o t o d B t a “ i w s e e t a d in b a b*. a r t m s w # a . l ab, 1 . 7D s li a k t a s p e co ce w i S W a V ( f ad t di b a a c w i ac e 8A a F ( s h t t o f c w t as u +n c

t e t t i d t t a h t i r 5 E W I a S O E f t eq i c u a f e r a S su t eq m s [ i t p l s [ a t r i t f s f [ t s t r e f p a y i [ a m w r b I t s N e co t bi = b f a i y t e w i c ( w t s G ( c e r S m y id ex f t m e r r B t , in a S w s c t s d w i t w a c e 5 E W I I E U a M E R f eq i c a m e r r su t eq c m [ O a s [ O i s f s 9O x f a m e r d f F a M ( w f t c in o f a S u a f e r b a a c pr di F a M a t t p d t S di f t t r t w e w t p o st di R ( f t t o d w i l t u t v s s l r t i c s i

f p a p*. t s t r i t f s f [ a ( a t C in r [ a ( M ( w r b (1 w r b a i t s N e c t bi = b a b,*= b*f a i a j y a r f b(b*) a b*(b) u a m e r b . - O + ” ( A +X w @ =~ - - A = &+ l X = (l [l @ = ~+ y =CX + A = &+ - X = ( i5 ( A t no i e ( i p f m in so o o p s e t a r n a l t e T p

( W au i m p p t r s s w s in e t a t t w a m exchange rate c t s d w i w s a S un t i b t r n f ( t t e r s t f m a i s d ]1 ad c s f ( ( a t e A B t p = p* w b = b eq w d a f w s c t s d w in t e t s d t f ( e n s o t d ( e T w s e e c t s d i t t w a S ( a c ec 5 E W I I E U a F E R U s me a o i c u a f e r r c d This n d t a t b c e c p s s s a id w s t d e w c a d w in t d f t d c t f e a S U t in a t m t f m a d n o t st di d H post, t a observe changes in the e r t a c s d a c t f money by an appropriate amount to keep the exchange rate at the optimal level given in (lOb).

( l p ( b ( = p +< +v w p = {( l }{ l ] ~ = ~2(l+@(l-~)4(1-b*)2 9 v(b’) = ( 2c l -b*)]}2, ~“(b) = {@(l -~)2+~[l+~(l-b) ]}{~(l-~)2[l+b+~( l-b)] +~[l+~(l-b)] }, ~“(b) = cx l v =( l } l+ N t t t r f a s T d n m t t i s f b a b*n a i h b t c d v a ~ g w n e N f e ( a ( t ~ = t b = 1 a = a t di a d d t o f d w s i w co T d o w r u t f d d s b t d p a t e r w f c s e ( o f f w s c b*= O o t e c t d p a t e r t a s d f t st t f c A r a f w b = Oa b* = 1 w 6 e = N t =a = O,then b = b* = O.

Co a ma v t t g a i r f ( m s u d a t t s a n ne m o t r O< b, b* < T f e f t s a ex l a d a t p a s v t m T a a n r a f a m e f w f i t n t c s in in c c t f e f b i t e v Oa a c t v b, f e e v b*, t a i ( t c t s f b i w f g t di t r d i e c f in C t s f b, we f t ( n v u c“> 25(1+CX)2 ( bl~.=l> b ~.=O‘f — 0: a(l -$2)2‘ a:. ~.-<, < 2 ( bl - b I~- if — ..O a - “ T t va f m d s r s s e s th ( t r s t i t t o d d w in d ( t f w i c f ( f 1 O( O 1 t c t w i c a s co I h t v r l t t t t i

c a s su T i t a i c o n ne r t a i c t o n F a g r ~ ~ t l t w i c w st co r t e b m i ( b a de F a g r ~ ~ t v t r e r r w t d in r ( ( Y = U(p-pe) + ~ - (x + ( w z- (p’+s-p) - t r e r a t c t r e r a s s Ceteris paribus, d w s w c a l v b to m t e t i s s H e r b*at t va t r e r a a d w s c a h v b m t e d m d s t c w in c a s c H d in a e i c r t o d in a S C ( ( c s t g w s in m c e h l d w i t w s s o e H f g v b l t d w s in e w c l v b t T d c p i g q = ( + f =p + B d w s i t d C ac t E e r c t r w a t a a s s s m c s t f o a c t r e r

t w a S r ~ a Q d ( t e b m in r r a a a d T i f w w s in e a m l c l w i co 6 d s R t f a g r ~2 t v t r e r r &a Q d T w s in e w c l d w in t t w a S m t e r e r c t a i s s Si d m d s a d a f v in ec a S d d s a o d v W = w s e a S i e w c b =O m t e t s s H r r ~ w s in e w c l d w i ( t c a S m t e c t f p a t e r t c t r w a t a d s s F d v t s c b s F a g s s o d m t s c s W s i ec f n o pr s b a c t f p a e r t a d s s W s a S f o t f T t s c s w s i e w c l d w i ( a S m t a s s i c p* a

s c t f p a e r t a t r w a a s s in e a a a F t i s s in e b m p / Q a u d a r r ~ a m m l t w s i ec w c l d w i r t c a S pr si s t w i r f [ a ( w y eq w i c H c s f b a b*a n r o f t g e ( a co n si f t s c w t c e c v d di ( =a s t b = b i e E t m s e a o o o e f s t w re no a l t e T s r a pr T a E c t f t s t e d w i t d a t f e T s t c t r c e t co t S o w a f t l c 6 + 0 Si t s t b r e t ( Q = c c e s w d a a e S o E t u l p e t ( v ~ a c w i c h in e T r T 1c t g r d a t i r t li t w s w c l i c t t

w a S T e t u l p T 1a s t t t ri c t b r T w i h i ec l t a S F e w 6 = 0 a Q = 0 w s in e w c a w i c 0 c w t co a S w c a c 0 t e b l in ( 6 a Q r t e d w i r N t f s p v w s in e c h in co t w s s o e T W I C (b a b*) ((X= 1, ~: =@ =a: ) 6 0 0 0 1 1 w 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 E T 2 s t e t a r ~ h t e d w in ( t s r r T s = =~ O c a =1 s m A a W ( t s t s a s f t U S a o n a c to 1. Our choice of c$~=G:. =CJ~serves strictly as a b

T c . ~ = T t r d a s t a r ~~ s i t l t w s i ec w c l d w i t t w a S T pr c t r T 2 w d c w w s in e c a h d i t w s a R b T a t t a m p v f w in c in e a h t a S T W I C a b*) (CX= 1, ~: =~:. =4(~;) ) 8 0 0 0 1 1 0 0 0 0 0 0 0 0 Q 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 T r t s r T 1 e t r u f 1 0 a w e a s s c h e w i c c T 1 w t w s c w w s in e c a h d i t t c a

I S t a s r c T 3 T s t g r d pr . Table 3: Wage Indexation Choices (b and b“) (a = 0 ( 8 = = ) 0 1 0.5 0.35 0.43 0.48 0.48 0.48 0.48 0.48 !2 0.7 0.38 0.46 0.48 0.48 0.48 0.48 0.48 0.9 0.46 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 C T p h e h e in c a t e d w in c w s W o o e i s e a s o e f t p f m i so in e H o o t s e fe U a m e r r w m a n o st di b i m p h s t 14The reason that the~ are very few entries in Table 3 that differ fmm the choice made in a SOE is due to the ve~ low value of CX.As a ~ O,the interdependent economy result conve~es to the SOE result. This is because as a ~ O,the supply cume approaches a vertical line. In this case, only productivity shocks, and not induced supply shocks caused c p*ands, can shift the supply cuxveand displace output.

at w s c a d w i t i t c a s o e U a f e r r t o d w in m g e h l t o i s o ec H t l t i c i e w l t s o e r t d i r t v m d s r r s s a a s c s a h a t i b w i c in e a h s t w i c g m e s co s s H t l t w in c w s c r t d i r a t v f m d s r r s s i e t h o t r a s w w in a W s d t f i c u t as t t i c c i t i r a co t b p m A t a c w t b t li w i B a S ( a C a D ( h do si c a w i t E a e t w a r w W a V ( M F ( C ( A ( a J ( h s h c w s c i t p c d m a c ec O i e e c w s t a t fr i t ce e t s f i s a

st in t i t p f m i s T t h l b t b t p m l s

25 A A T s s t m g t f e ( y + Y = a + O< aO< 1; (A2) l: = -al(wi - p - 0), lj”d = ‘a~( Wj* - P*- U al ~ l/(l-ao); (A3) l; = r(wi - q)> l = r - q*); (A4) q = L2p+ (1-L2)(p* + s), q* = Qp” + (1-o)(p - s), Q > 1/2; (A5) ~ = (a,+~)-’[(al+fl~)p + r + S + % r $ = ( + rcl-i2)-( S p +al4 (A6) bj”(q”- q“e), Wi = +.e + bi(q - qe)> Wj” = ~,’< + 1 w S l em f ~ l t n w r p f p ~ l t p l q S l t c p i a s S l t e r m t u d c p u f c E ( a t p f d f i a f f eq ( a t i l d s a e ( a t ante l s sc E ( d t c p i E ( g t Wa ma w t w a t a c w e ( a t c w S t e ( i ( a t r i (A2)a t i ( y t e f e ( a ( t t w u ~ aoal a w h b a t t l c w r - Oh ( m h b s f t g c b s s t t l a s t e g w a t

fu n t co t p W f i a s ec s t m a y t e f ~ a ~*t a g t t

.,27 A B A = u ]+ A (=l a A c@l-K2)[l +a(l -b*)] A = + + - - AZ,= a2b*(l-b)(l-Q)2 A = a +a(l -b)]+ab(l-Q)2} A23= ab*5(1–Q)[l+a(l -b)] A,4= ( - - Q A31= a{tl(l -b)+a(l -Q)[l -K2(b+b*)+(2SLl)bb*]) A32= a2(l-Q)2b(l -b*)2 A,3= (1+a -Q A41= a{b(l -b”)+a(l -Q)[l-Q(b+b*)+(2Q-l )M”]} A42= a(l-b”){~[l +a(l-b)]+ab(l -Q)’} A,3= (1+a){&[l +a(b*-b)]+a(l-Q)[(l+ b-Q(b+b*)]} A51= ~+a(l -Q)[l +b-fl(b+b”)] A~~= cx2b(l-bj(l -q2 A,3= (l+a)A51 A61= i5+a(l-Q)[l +b*-Q(b+b*)] A62= 3[1+a(l -b)]+a(l-Q)2[b+ b*+ab*(l -b)] A63= (l+a)A61 B,, = a(l -S2)2[1+b”+a(l -b”)]+b[l+a(l -b”)] B,2= a(l +a)(l -b*)(l-Q)2 B - i5[l+a(l -fM)][l+a(l -b”)]+aQ(l -Q)2[b+b”+a(b+b*-2bb*)] 13 – B,4= a(l -!2){(1-L2)2[b+b”+a(b+b*-2M”)] - ~b[l+a(l - b“)]} Bl,= (l+a){2ab*(l-~)2+ 6[l+a(l-b*)]} B21= a(l+a)(l -b - B22= a(l -!2)2[1+b+a(l -b)]+~[l+a(l -b)] B23 = a(l -Q){(1- i2)2[b+b”+a(b+b*-2bb*)]- M“[ +a(l - b)]} B‘4= ~l+a(l-b)][l+a( l-flbj]+ aQ(l-Q)2[b+b*+a(b+b*-2M”)] Bz,= (l+a){2ab(l-Q)2+ 3[l+a(l-b)]} B31= 5+a(l-Q)[l+b*(l -2Q)] B32 = a(l +a)(l - - L B2,3= (bl+’a){5+a(l-Q)[) l+b”(l-2Q)]} ’( B41= 5+a(l-Q)[l+b(l-2L2)] B,2= 5[1+a(l -b)]+a(l-S2)2[l+b+a(l -b)] B,3= (l+a){S+a(l-Q)[ l+b(l-2Q)]}

28 D,,=A + P D = A + 1%4%1 Dzl = A*3A22 + ~B23B22 D 2 = A + ~ 1 5 + - + a(l-L2)2[b+b”+ct(b+b”-2bb*)] b) Am=6[+1a(l-b)] + a(l-Q)[l +b-L2(b+b”)]+ a2(l-Q)[l -i2(b+b”)+(2Q-l )bb”]

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