Social Partnership and Exchange Rate Policy. — A Gametheoretic Approach
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Many central banks in Europe fix the exchange rate of their currency to the Deutsche Mark. The arguments for choosing this policy center on a simple idea: A fixed exchange rate to an inflation-free currency of a big neighbour forces the exposed sector to keep constant its prices and wages. Otherwise the exposed sector would price itself out of the international and domestic market. What concerns the prices and wages of the sheltered sector it was hoped that they would not increase due to some form of solidarity among entrepreneurs or workers within a country [Frisch, 1976], or due to price and wage controls by the state or by the social partners, or due to sufficiently important substitution effects between the sectors.
KeywordsExchange Rate Central Bank Trade Union Real Exchange Rate Domestic Firm
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