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Macro-economic Stability and Policy Rules in a Two-Sector Model of an Open Economy

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Author Info
Lawrence Schembri

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Abstract

Purchasing power parity exchange-rate rules are often used in open economies to stabilize the demand for exports and domestic output. R. Dornbusch (1982) shows tha t such rules may increase the variability of output via the supply si de by destabilizing the price of imported intermediate goods. Here a two-sector, wage-spillover model is employed to demonstrate that this result is more likely because although exchange-rate indexation woul d decrease the variability of output in the traded goods sector, it m ay increase the variability of output in the nontraded goods sector a nd in the aggregate via the wage linkage between sectors.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 21 (1988)
Issue (Month): 1 (February)
Pages: 87-96
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Handle: RePEc:cje:issued:v:21:y:1988:i:1:p:87-96

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  1. Polackova, Hana, 1997. "Inflation in nontradables and the macroeconomic policy mix : a model with policy application to transition economies," Policy Research Working Paper Series 1702, The World Bank. [Downloadable!]
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