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Openness, relative prices, and macro-policies

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  • Aizenman, Joshua

Abstract

This paper analyzes the role of relative prices in the conduct of wage indexation and monetary policy in a small economy producing traded and non-traded goods under a flexible exchange rate regime. It is shown that the beneficial effect of using relative prices in addition to aggregate prices as indicators for the conduct of the above policies increases with openness. The response of policies to relative prices rises with openness,and has dampening effects on the volatility of deviations from purchasing power parity. The analysis demonstrates that the beneficial effect of allowing a"basket" indexation (or a money rule that responds also to relative prices) lies in mitgating the effects of foreign shocks.
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  • Aizenman, Joshua, 1985. "Openness, relative prices, and macro-policies," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 5-17, March.
  • Handle: RePEc:eee:jimfin:v:4:y:1985:i:1:p:5-17
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    1. Joshua Aizenman, 1985. "Wage Flexibility and Openness," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 539-550.
    2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    3. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, pages 231-256.
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