DP215 Competitiveness, Wage Adjustment and Macroeconomic Policy in a Small Open Economy

Author(s): George Alogoskoufis
Publication Date: December 1987
Keyword(s): Competitiveness, Greece, Macroeconomic Policy, Open Economy, Wages
JEL(s): 023, 131, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=215

In this paper I investigate the relationships between wage adjustment, competitiveness, macroeconomic policy and aggregate fluctuations in a small open economy. Based on a model of an economy producing both traded and non-traded goods, and assuming that the traded goods sector is competitive while the non-traded goods sector is oligopolistic, I show that real wages in the traded goods sector are negatively related with competitiveness. Wage setting is what determines competitiveness, output and inflation, and is pivotal for the effects of macroeconomic policies. The model is estimated and tested for the postwar period, and is used to assess the macroeconomic experience and policy options in Greece.