Determination of Wages and Exchange Rate with Game Theory (Case Study: Iran) By Vida VARAHRAMI a

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1 Journal of conomic and Social Thouht.kspjournals.or Volume December 5 Issue 4 Determination of aes and xchane Rate ith Game Theory (Case Study: Iran) y Vida VRHRMI a bstract. In every country, aes are determined by Nash rule or overnments determine aes. ccordin to Nash equilibrium, policy of determination aes is respect to exchane rate and there is a ame beteen NC and MS. In this paper, e survey a ame theory method to survey policy of determination aes and exchane rate to stability economics. hen exchane rate increases, import ood's price rise and e have cost push inflation, therefore aes are increased and then e have unemployment. Then aes are determined respect to exchane rate chanes. ut in real orld, some conditions affected on Nash equilibrium and aes are determined as non Nash method and overnment equals beteen benefits of orkers and principals. In this paper, e survey ae makin in Iran and reveal that in some courtiers such as Iran, overnment determines aes and create equilibrium in labor market. Keyords. ae, xchane rate, Nash quilibrium, Inflation, Game theory method. JL. Q, Q, Q.. Introduction xchane rate and ae are economic variables. In some countries, aes are determined as neotiation beteen orkers and principals. In this paper, NC is orker's syndical or overnment hich ants to equal beteen orkers and principals. If aes are determined ron, it is caused to inflation. In some countries, exchane rate is determined by overnment and it's value is affected on export, import, economic roth and employment. In other hand, exchane rate can affect on aes. Depreciation of inter money respect to forein money is caused to expensive import of inputs, then e have cost push inflation and aes are increased. In this paper, e survey ame beteen NC or ae makers and MS or exchane rate determinations and sho overnment is a ae maker and Nash equilibrium is not applied in Iran. s follo, model in second part, variables ad estimations in third part and conclusion in forth part are revised.. Model Relation beteen NC and MS is affected on exchane rate and aes. In this ame, NC determines aes at first and then MS determines exchane rate and player's payoff is defined respect to inflation and unemployment rate. xchane rate is defined as price index of non oil a University of Shahid eheshti, Tehran, Iran vida.varahrami@mail.com

2 Journal of conomic and Social Thouht products and ULC is cost of to employ each orker. Therefore, e can define relation beteen inflation and factors hich affected on it, as equation (); LnCPI a [ Ln Ln ] a[( ) Ln LnCPI ] a[( ) Ln LnCPI ] a4lnop () quation () is reritten as; a a a ( ) a( ) a a4 OP () In equation (), variables are; Current inflation rate, inflation rate in to years ao, inflation rate of forein non oil products. ppreciation tare of inter money respect to forein money. Groth rate of current aes and roth rate of aes ith to las. OP Inflation rate of oil products ith to las, elasticity of ULC respect to CPI and LP is expected inflation rate. e can rerite equation () as belo; a a a ( ) a( ) a a4 U b b b[ OP ] b b b CPFC 4 () In equation (), e have; U unemployment rate, third la of roth third la of inflation rate, CPFC unemployment insurance. of ae and orkers are neotiated ith principals to determine aes in competitive markets and orkers ant to equal beteen their income and ork hours. Therefore, orkers ant more aes respect to money hich received. Government knos that more aes is cussed to more inflation and less economic roth. Then overnment should determine aes hich equal beteen inflation rate and unemployment. Therefore NC ants to minimize equation (); ˆ [( ) ULCf ] [ ( U U) ( ˆ) ] [ ( ) U] () In equation (),,, are neotiation poer of orkers, overnment and principals. is overnment benefits hich decline from inflation ( ) and unemployment ( U U )., U are anted inflation and unemployment rates. In equation (),,, and i. In this equation, first part is cost of to employ orkers and second part is overnment costs. hen unemployment and inflation are deviated from it's anted rates. In equation () third parameter is cost of rise of unemployment and inflation. NC minimize equation () respect to and e have optimal roth of aes; i JST, (4), V. Varahrami, p

3 * U Journal of conomic and Social Thouht OP CPFC (4) Therefore; * f (, ULCf, OP,,,,, U,, CPFC ) dard (98), Kamin (998), Chei and inkle (999) revealed that depreciation of inter money respect to forein money is caused to more export and less import. In this condition, if money is dependent to import of inputs, it is caused to inflation and more aes. MS defines exchane rate and minimize equation (5); ( ) ( ) (5) In equation (5), is exchane rate roth and is deviation of inflation from it's anted rate. Therefore, e have a ame beteen MS and NC. t first, ae ( ) is determined by NC respect to equation (4) and MS minimize equation (5) respect to equation (5) respect to optimal * * Therefore; ULCf. fter NC, MS minimize as equation (6); and e have * OP * h(, ULCf, OP,,,,,, U,, CPFC ) Respects to Nash equilibrium, appreciation of inter money reveals reaction of MS respect to optimal roth rate of ae ( * ) hich, that is response of NC. Therefore accordin to Nash rule, every aents determine their optimal instruments to achieve optimal benefits and equilibrium. t the end, Nash equilibrium is intersection of MS and NC strateies.. Variables and stimation In this paper, e use from data of -4 for Iran and these data are collected from international money fund, central bank and amar center. In i our estimation i ( i ), hich i is eiht of Iran trade ith ten countries hich has most trade ith Iran in our period and is exchane rate. Variables in our model are; CPI: Consumer price index e do not have data of 5 Imaret rabia, Germany, France, Italy, China, Korea, nland, Russia, Japan, Spain. (8) JST, (4), V. Varahrami, p

4 ULC f : Cost of orker ( Journal of conomic and Social Thouht ) L P L P ( ) : Productivity of orker CPI U: Unemployment rate : Inflation rate CPFC: Unemployment insurance : verae ae in industry sector ULC : Cost of forein orker. f i : Price index of non oil import oods. OP: Price index of oil import oods. IP: stimated exchane rate for non oil oods : Inflation rate of oil products OP LP : Inflation rate of non oil products : Groth of orker's productivity : Groth rate of ae. : ppreciation of s e said above, price index equation is as equation (7); LnCPI a (7) ULC is ritten as; LnIP aln( ULC) aln( OP) LnULC ( ) Ln LnCPI (8) Is a parameter in labor productivity function and ULC roth is; ( ) (9) ULC ccordin to Philips curve, e have; U b b b b4 LP b5cpfc () stimation results of equation (7), (9) and () ith OLS method and ith vies 7, are as belo; R ULC (.6) / 5 (/) D /8 (/ 8) / 95 D /87.6 (4 / 46) LnCPI / 85LnIP / 49LnULC / 48Ln( ULC) R (4 /6) (6 / 5) / 65Ln( OP) (4 / 95) () () Ordinary Lease Square JST, (4), V. Varahrami, p

5 Journal of conomic and Social Thouht U / 8 /74 R (9 /8) / 78 D / 9 (4 / 75) /9 / 8 (/ 9) ( /88) L / 58CPFC (/ 6) () Respect to equation (), a / 85, a / 49, a / 48, a4 / 65 and respect to equation (), b / 8, b / 74, b /9, b / 58 hich are used in equations () and (). ccordin to equations (5), (6), () and (), e can rite; / 67 / 4 / 54 /6 / 89 /87 /54 * ULCf / 55 /4 / 55 /4 / 55 /4 / 55 /4 /78 /4 / 4 / / 67 / 74 OP / 55 /4 / 55 /4 / 55 /4 / 55 /4 (4) / 54 / 4 * CONS / 4 / 46 / 6 / 4 / 4 / 54 / 4 / 4 / 46 / 6 / / 6 / 7 OP / 46 / 4 / 46 / 4 / 46 / 8 / 6 CPFC U / 46 / 4 / 46 / 4 / 46 / 7 / / / 4 / 46 / 7 / 4 / 46 (5) quilibrium stratey of Nash equilibrium is dependent to (4) and (5) equations. ut in some conditions e do not arrive to Nash equilibrium, these conditions are as belo; - If orker's neotiation poer increases, aes rise and if principal dependent to overnment's neotiation poer, inflation and unemployment rates. - If forein inflation increases, price of import oods rise, e have inter inflation and aes increase. If unemployment insurance decreases, aes increase too. - If exchane rate increases, or inter money depreciate, import input prices are increased and is caused to inter inflation. Therefore arrivin to Nash equilibrium is very hard and impossible. 4. Conclusion In this paper, e survey a ame theory method to survey policy of determination aes and exchane rate to stability economics. hen exchane rate increases, import oods price rise and e have cost push inflation, aes are increased and e have unemployment. Therefore aes are determined respect to exchane rate chanes. s e said, aes are determined as a ame beteen MS and NC. ut in real orld, some conditions affected on Nash equilibrium and aes are determined as non Nash method and overnment equals beteen benefits of orkers and principals. In Iran overnment has important role in determination of aes. JST, (4), V. Varahrami, p

6 Journal of conomic and Social Thouht References Helmers, F.L.C.H. (988). Real-exchane-rate indexes. ppendix C in The Open conomy, edited by R. Dornbusch and F.L.C.H. Helmers, DI Series in conomic Development, Holmlund,., & P. Skediner. (99). ae barainin and ae drift: evidence from the Sedish ood industry, in ae Formation and Macroeconomic Policy in the Nordic Countries, edited by Lars Calmfors. SNS Forla and Oxford University Press. u, Y. (999). Macroeconomic coordination of exchane rate and ae movements under Quasi-sterilization: Sinapore experience. Pacific conomic Revie, 4(), 85-. doi../ Yin,., Goh, K.H., & Lee,.K. (4). The interplay of ae and exchane rate policies in Sinapore: case of collective barainin in macroeconomic manaement, Contemporary conomic Policy, (), doi..9/cep/byh4 Youn,. (99). tale of to cities: Factor accumulation and technical chane in Hon Kon and Sinapore, in NR Macroeconomics nnual 99, dited by O. J. lanchard and S. Fisher. Cambride, M: MIT Press, pp. -54 Copyrihts Copyriht for this article is retained by the author(s), ith first publication rihts ranted to the journal. This is an open-access article distributed under the terms and conditions of the Creative Commons ttribution license ( JST, (4), V. Varahrami, p