Wage contracts, capital mobility and macroeconomic policy

This paper studies the effects of macroeconomic policy shocks in an optimizing model with imperfect capital mobility and nominal wage contracts with backward- and forward-looking expectations. The long-run effects of a cut in government spending on nontraded goods are shown to be independent of the expectational mechanism embedded in wage contracts. By contrast, a reduction in the nominal devaluation rate lowers (raises) steady-state output in the export sector under backward-(forward-) looking contracts. Impact effects and transitional dynamics associated with both types of wage contracts are also characterized.