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Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination

  • Yiannis Stournaras


    (Bank of Greece and University of Athens)

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    In 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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    Paper provided by Bank of Greece in its series Working Papers with number 26.

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    Length: 32 pages
    Date of creation: Jul 2005
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    Handle: RePEc:bog:wpaper:26
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    1. Rankin, N, 1986. "Debt Policy under Fixed and Flexible Prices," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 481-500, November.
    2. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.
    3. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
    4. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
    5. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
    6. Moschos, D. & Stournaras, Y., 1998. "Domestic and foreign price links in an aggregate supply framework: The case of Greece," Journal of Development Economics, Elsevier, vol. 56(1), pages 141-157, June.
    7. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, vol. 13(3), pages 309-332, May.
    8. Rankin, Neil, 1987. "Disequilibrium and the Welfare-Maximising Levels of Government Spending, Taxation and Debt," Economic Journal, Royal Economic Society, vol. 97(385), pages 65-85, March.
    9. David Vines, 2003. "John maynard keynes 1937-1946: the creation of international macroeconomics," Economic Journal, Royal Economic Society, vol. 113(488), pages F338-F361, 06.
    10. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695.
    11. Krugman, Paul, 2000. "How Complicated Does the Model Have to Be?," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 33-42, Winter.
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