Wage Rigidity and Capital Mobility in an Optimizing Model of a Small Open Economy
AbstractThis paper formulates an optimizing model of a small open economywith a representative (immortal) household, a firm and agovernment. The asset menu consists of domestic currency,non-traded bonds and traded bonds. There is a risk-premium ontraded bonds, which leads to deviations from perfect capitalmobility and UIP. Taxes are lump-sum, so that finance by bonds andby taxation are equivalent. The model allows for current-accountand wealth dynamics. There are six versions of the model dependingon whether one assumes purchasing power parity or imperfectsubstitution between home and foreign goods and on whether there islabour market equilibrium, nominal wage rigidity or real wagerigidity. For each of these variants, the steady-state effects of afiscal contraction, monetary disinflation, a worsening of thesupply side, an increase in the world interest rate, and a resourcediscovery are discussed. The transient effects of these policiesfor some of these versions are analysed with the aid of a "multipleshooting" algorithm.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 168.
Date of creation: Mar 1987
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Other versions of this item:
- Klundert, T.C.M.J. van de & Ploeg, F. van der, 1987. "Wage rigidity and capital mobility in an optimizing model of a small open economy," Research Memorandum 277, Tilburg University, Faculty of Economics and Business Administration.
- Klundert, T.C.M.J. van de & Ploeg, F. van der, 1989. "Wage rigidity and capital mobility in an optimizing model of a small open economy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4860201, Tilburg University.
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