The Mundell proposition with efficient wage-employment bargaining

This paper proposes a new route, namely efficient bargains between the union and the firm over wage and employment, to shed light on the robustness of the Mundell (1963) proposition. It is found that, in a flexible exchange rate economy with perfect capital mobility, a fiscal expansion will have a positive impact on domestic output, while a monetary expansion will be entirely incapable of altering domestic output. As a consequence, the standard Mundell proposition is not tenable if the union and the firm negotiate an efficient wage-employment contract.