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Wage rigidity and capital mobility in an optimizing model of a small open economy

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  • Klundert, T.C.M.J. van de
  • Ploeg, F. van der

    (Tilburg University, Faculty of Economics and Business Administration)

Abstract

This 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 Info

Paper provided by Tilburg University, Faculty of Economics and Business Administration in its series Research Memorandum with number 277.

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Date of creation: 1987
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Handle: RePEc:dgr:kubrem:1987277

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Web page: http://www.tilburguniversity.edu/nl/over-tilburg-university/schools/economics-and-management/

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References

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  1. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  2. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
  3. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis," NBER Working Papers 0832, National Bureau of Economic Research, Inc.
  4. Lipton, David, et al, 1982. "Multiple Shooting in Rational Expectations Models [The Solution of Linear Difference Models under Rational Expectations]," Econometrica, Econometric Society, vol. 50(5), pages 1329-33, September.
  5. Driskill, Robert & McCafferty, Stephen, 1980. "Exchange-Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility under Rational Expectations," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 577-86, November.
  6. van de Klundert, Theo & van der Ploeg, Frederick, 1989. "Fiscal Policy and Finite Lives in Interdependent Economies with Real and Nominal Wage Rigidity," Oxford Economic Papers, Oxford University Press, vol. 41(3), pages 459-89, July.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Stephen J. Turnovsky, 1985. "Domestic and Foreign Disturbances in an Optimizing Model of Exchange- Rate Determination," NBER Working Papers 1407, National Bureau of Economic Research, Inc.
  9. Jacob A. Frenkel & Carlos A. Rodriguez, 1982. "Exchange Rate Dynamics and the Overshooting Hypothesis (La dynamique des taux de change et l'hypothèse du surajustement) (La dinámica de los tipos de cambio y la hipótesis del ajuste excesivo," IMF Staff Papers, Palgrave Macmillan, vol. 29(1), pages 1-30, March.
  10. Willem H. Buiter & Marcus Miller, 1991. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 239-277 National Bureau of Economic Research, Inc.
  11. Casas, F R, 1975. "Efficient Macroeconomic Stabilization Policies under Floating Exchange Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 682-98, October.
  12. van der Ploeg, Frederick, 1987. "International Interdependence and Policy Coordination in Economies with Real and Nominal Wage Rigidity," CEPR Discussion Papers 217, C.E.P.R. Discussion Papers.
  13. Eaton, Jonathan, 1985. "Optimal and time consistent exchange-rate management in an overlapping-generations economy," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 83-100, March.
  14. Corden, W M, 1981. "The Exchange Rate, Monetary Policy and North Sea Oil: The Economic Theory of the Squeeze on Tradeables," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 23-46, Supplemen.
  15. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  16. Turnovsky, Stephen J & Bhandari, Jagdeep S, 1982. "The Degree of Capital Mobility and the Stability of an Open Economy under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 303-26, August.
  17. Camilleri, Arthur P & Nguyen, Duc-Tho & Campbell, Robert B, 1984. "Policy Changes and External Disturbances in a Small Open Economy: Stability and Dynamic Responses," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 123-58, February.
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Cited by:
  1. Meijdam, A.C. & Stratum, R. van, 1990. "Dynamic adjustment and debt accumulation in a small open economy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-381406, Tilburg University.

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