Flexible exchange rates, macroeconomic policy and alternative wage-setting regimes

Abstract

This paper analyses the price and output effects of monetary and fiscal policy in a small open economy
with perfect capital mobility, flexible exchange rates and alternative wage - setting regimes. In the canonical
models of Mundell - Fleming monetary policy is effective while fiscal policy is completely ineffective to
raise domestic output. When real wage resistance prevails, though, the order is reversed. It is shown that
the effects of monetary and fiscal policy depends not only on the wage regime that prevails, but also on
the assumptions we make about the form of the demand for money function.