In an influential paper, Branson and Rotemberg (1980) argue on the basis of empirical evidence, that nominal wage rigidity characterizes the US economy whilst real r*

0 Yi *

Yo=- Yo *

Yi Y,Y *

Figure 11.1'

(11.53) both counit wage rigidity well describe country and the US the fc time being), the model de setting A. = 1 and A* = 0. 1 once again proceed by ity, it is fully described I The US economy, on the described by LM* (AS;- ) L.

The different schedules lo is at eo.

A European fiscal eA, .

and GME'k, with the fa 288 Chapter 11: The Open Economy untries are obtained by equatn terms of the real exchange is used to indicate that real

(GMER)

- 7/g1

(GMER)

lion, fiscal policy constitutes This can be illustrated with

'nding in the domestic counn of the domestic economy ges are fixed, the producer

!mployment are stimulated.

,lucer wage rises. By raising icer wage to rise, as foreign 71 their consumption wage rrency. For future reference ipliers. First we use (GMER)

'1 fiscal policy on the real

(11.52)

-silt effects:

> O. (11.53)

.r-thy-neighbour property Se rigidity.

under real wage rigidity. As rest rate, output levels, and se in m causes an (equal)

rate (dp = dw). Since the rate depreciates by the full I wage rigidity

--71e on the basis of empir-

US economy whilst real