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Mr. Andrew Berg, Lahcen Bounader, Nikolay Gueorguiev, Hiroaki Miyamoto, Mr. Kenji Moriyama, Ryota Nakatani, and Luis-Felipe Zanna

. Endogenous Mark-up: Income and Inequality Source: IMF staff calculations Figure 18. Endogenous Mark-up: Disposable Incomes Source: IMF staff calculations Figure 19. Equally Distributed Equivalent Income Source: IMF staff calculations. Figure 20. Social Welfare Function Source: IMF staff calculations. Figure 21. Evolution of Economic Variables in the Sensitivity Analysis Figure 22. Income and Inequality Source: IMF staff calculations. Figure 23. Disposable Incomes Source: IMF staff calculations

Pierre-Richard Agénor
This paper examines the long-run effects of macroeconomic policy shocks on the behavior of output, inflation, real wages and the real exchange rate in a small open economy. The analysis is based on a two-sector, three-good optimizing model with imperfect capital mobility, nominal wage contracts with backward- or forward-looking price expectations, and endogenous mark-up pricing in the nontraded goods sector. The effects of a cut in government spending on nontraded goods are shown to be independent of the expectational mechanism embedded in wage contracts. A reduction in the nominal devaluation rate lowers steady-state output in the tradable sector under backward-looking contracts, but exerts an expansionary effect under forward-looking contracts.
Pierre-Richard Agénor

policy shocks, using a specification of wage contracts first proposed by Willman (1988) . Section II develops the analytical framework, which consists of a two-sector, three-good optimizing model with endogenous mark-up pricing in the nontraded goods sector. Section III studies how alternative assumptions regarding contract formation affect the dynamic structure (iii) FDI in search of a low-cost labor force promotes conditions (a) and (b) by shifting production locations of labor-intensive products to developing countries (Helpman (1984) and (1985)). As a

Mr. Andrew Berg, Lahcen Bounader, Nikolay Gueorguiev, Hiroaki Miyamoto, Mr. Kenji Moriyama, Ryota Nakatani, and Luis-Felipe Zanna

Income (EDEI) D. Social Welfare Based on Utility Function VI. ENDOGENOUS MARK-UP—AN ILLUSTRATIVE EXAMPLE A. Relationship Between Automation and Price Mark-up B. Impact of Endogenous Mark-up on Production Efficiency: Two Additional Transmission Channels C. Welfare Implications of the Endogenous Mark-up VII. SENSITIVITY ANALYSIS VIII. SUMMARY OF THE RESULTS AND POLICY IMPLICATIONS REFERENCES FIGURES 1. Growth Accounting: Baseline 2. Disposable Income Decomposition: Baseline 3. Raising Tax on Capital Income 4. Wealth Tax 5. Consumption Tax 6

International Monetary Fund

Nominal wage rigidity and imperfect capital mobility are two important macroeconomic features of many developing countries. This paper integrates both features in an analysis of the effects of macroeconomic policy shocks on output, real wages, the real exchange rate, and the current account. The analysis is based on a two-sector, three-good optimizing model with endogenous mark-up pricing in the nontraded goods sector. Both backward-and forward-looking wage contracts are considered. Because of the highly complex dynamic structure of the model (which is

Pierre-Richard Agénor

macroeconomic features of many developing countries. This paper integrates both features in an analysis of the effects of macroeconomic policy shocks on output, real wages, the real exchange rate, and the current account. The analysis is based on a two-sector, three-good optimizing model with endogenous mark-up pricing in the nontraded goods sector. Both backward-and forward-looking wage contracts are considered. Because of the highly complex dynamic structure of the model (which is shown to depend crucially on the nature of the expectational mechanism embedded in wage

Mr. Andrew Berg, Lahcen Bounader, Nikolay Gueorguiev, Hiroaki Miyamoto, Mr. Kenji Moriyama, Ryota Nakatani, and Luis-Felipe Zanna
Many studies predict massive job losses and real wage decline as a result of the ongoing widespread automation of production, a trend that may be further aggravated by the COVID-19 crisis. Yet automation is also expected to raise productivity and output. How can we share the gains from automation more widely, for the benefit of all? And what are the attendant equity-efficiency trade-offs? We analyze this issue by considering the effects of fiscal policies that seek to redistribute the gains from automation and address income inequality. We use a dynamic general equilibrium model with monopolistic competition, including a novel specification linking corporate power to automation. While fiscal policy cannot eliminate the classic equity-efficiency trade-offs, it can help improve them, reducing inequality at small or no loss of output. This is particularly so when policy takes advantage of novel, less distortive transmission channels of fiscal policy created by the empirically observed link between corporate market power and automation.
Mai Dao
This paper uses a dynamic economy model, with unionized labor markets, to analyze the effects of labor market reforms, similar to those recently introduced in Germany, on the domestic and trading partner economies. The model is calibrated on Germany and the rest of the Euro area. The results indicate that German labor market reforms have positive spillover effects on the rest of the Euro area, which operate through the channel of trade, relative price adjustment, and financial market integration. Compared to a competitive labor market, setting, unionization dampens the positive response of the domestic economy and magnifies the spillover effects.
Mai Dao

economy. Any policy that reduces unemployment benefits, or the mark-up, will create higher employment and, hence, more output. 9 It is worth mentioning that our framework of labor market imperfection in the form of unionization differs from the common model of workers’ exogenous wage-setting power (e.g. Erceg et al., 2002). First, instead of assuming an exogenous mark-up, we are able to derive an explicit wage bargaining problem, and an endogenous mark-up factor. Second, while models with an exogenous mark-up still link labor supply to the marginal rate of substitution

International Monetary Fund
This compilation of summaries of Working Papers released during January-June 1995 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201.