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...

This paper investigates the dynamic effect of government spending in an optimizing monetary model of open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real...