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

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  • Lawrence Schembri

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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  • Lawrence Schembri, 1988. "Macro-economic Stability and Policy Rules in a Two-Sector Model of an Open Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 21(1), pages 87-96, February.
    • Handle: RePEc:cje:issued:v:21:y:1988:i:1:p:87-96
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    Cited by:

    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.

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