We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, (ii) an increase in wage...

This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. The paper presents two surprising results. First, a pegging economy might be better off with a closed...

What is the role of contracting schemes for the welfare costs of nominal rigidities over the business cycle? We examine 4 different modeling schemes of nominal rigidities that all have the same average duration of contracts. We find that Calvo (1983) wage and price contracts may deliver welfare...

This paper analyses the implications of real wage rigidities in a stochastic two-country general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. Assuming that the choice of whether or not to adopt flexible wages is in the hands of labour...

We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the "China shock." We find that...

The existing literature on shifting trend inflation has, for the most part, focused on the Calvo staggered nominal contracts to address welfare issues. This paper proposes alternative nominal contracts in the form of Taylor in a fully specified medium small-scale New Keynesian Model featuring...