Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination
AbstractIn an aggregate supply, aggregate demand model of an open economy with imperfect competition in labour and product markets, the effectiveness of monetary and fiscal policies depends on the degree of wage indexation, the exchange rate regime and the currency denomination of the international prices of raw materials, such as oil. In a two country world with a floating exchange rate, real consumer wage rigidity and the prices of imported raw materials fixed in the currency of Country 2, monetary policy is effective only in Country 2, but fiscal policy is relatively more effective in Country 1. These results may explain certain characteristics and have certain implications for economic policy in the US and the Eurozone.
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Bibliographic InfoPaper provided by Bank of Greece in its series Working Papers with number 26.
Length: 32 pages
Date of creation: Jul 2005
Date of revision:
Open economy macroeconomics; real exchange rate; oil price denomination;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-18 (All new papers)
- NEP-CBA-2006-11-18 (Central Banking)
- NEP-ENE-2006-11-18 (Energy Economics)
- NEP-IFN-2006-11-18 (International Finance)
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