Exchange Rate Policy in the Presence of a Strong Trade Union
The main result of the paper is that an exchange-rate policy which keeps the exchange rate constant is, for the government, only a second-best solution. In the first-best solution, the government prefers to dampen external shocks by appropriate changes in the exchange rate if it regards the use of fiscal instruments as costly. The model is kept simple by restricting it to a two-person game. The participation of the entrepreneurs in the game is excluded. Consequently, the policy options are reduced to a conflict between the government and the trade union.
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