Transaction Costs, Multiple Equilibria, and the Mundell Proposition

Abstract

This paper inserts Coase (1937) assertion into Mundell (1963) model. That is, investigating the robustness of Mundell (1963) proposition with the consideration of transaction costs in the labor market. The result shows that the existence of transaction costs makes the externalities of transaction costs in the labor market. Therefore, labor market appears to be multiple equilibria. If labor market appears as low-employment equilibrium, the Mundell proposition cannot work thoroughly under both fixed and flexible exchange rates. If labor market appears as high-employment equilibrium, the Mundell proposition is valid under fixed exchange rates but will be invalid under flexible exchange rates.