Devaluation, Profitability and Investment: A Model with Anticipated Future Wage Adjustment
1984 (English)Report (Other academic)
This paper studies the role of devaluation in stimulating profitability, investment and economic activity in a rational expectations model with wage contracts which inject an element of short-term nominal wage rigidity.
It is shown that when real wages are expected to be restored through post-devaluation negotiations then devaluation sets off a cyclical path in the optimal investment rate. The effect on the trade balance in the short term is uncertain, because devaluation increases both saving and investment. Devaluation is in this case neutral with regard to all real variables in the long run.
Place, publisher, year, edition, pages
Stockholm: IIES , 1984. , 31 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 287
IdentifiersURN: urn:nbn:se:su:diva-41288OAI: oai:DiVA.org:su-41288DiVA: diva2:329321