IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/438.html
   My bibliography  Save this paper

Wages, the Terms of Trade, and the Exchange Rate Regime

Author

Listed:
  • Douglas D. Purvis

Abstract

This paper analyzes a two-commodity short-run macroeconomic model under fixed and flexible exchange rates. Goods are disaggregated into imports and exports. Both are consumed domestically, but only the latter is produced at home. While imports are available in international markets at a fixed price, relative size matters in that the country's specialized export good faces a less than infinitely elastic foreign demand. The seemingly natural disaggregation used here yields a model that is better suited than traditional models for the analysis of such problems as imported inflation and for flexible exchange rates. Also, the terms of trade is explicit and hence easily distinguished from the exchange rate, and the model can be used to illustrate the relationship between the elasticities, absorption and monetary approaches. A common theme in the contemporary literature on flexible exchange rates is that the exchange rate is determined by financial portfolio decisions; a key assumption implicit in such models is that changes in the exchange rate have no real effects, even in the short run. The present approach imposes more structure on the problem by introducing possible short-run real effects of the exchange rate due to less than infinitely elastic export demand and explicitly specified domestic supply. The stability and comparative static properties of the model are shown to depend crucially on the specification of aggregate supply and the behavior of wages, in addition to relative size, and it is surprising that so little attention has been paid in the literature to this issue.

Suggested Citation

  • Douglas D. Purvis, 1976. "Wages, the Terms of Trade, and the Exchange Rate Regime," Cowles Foundation Discussion Papers 438, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:438
    Note: CFP 445.
    as

    Download full text from publisher

    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d04/d0438.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    2. Dornbusch, Rudiger, 1976. " The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 255-275.
    3. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 208-217, May.
    4. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    5. Niehans, Jurg, 1975. "Some doubts about the efficacy of monetary policy under flexible exchange rates," Journal of International Economics, Elsevier, vol. 5(3), pages 275-281, August.
    6. Rodriguez, Carlos Alfredo, 1979. "Short- and Long-Run Effects of Monetary and Fiscal Policies under Flexible Exchange Rates and Perfect Capital Mobility," American Economic Review, American Economic Association, vol. 69(1), pages 176-182, March.
    7. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:438. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew Regan). General contact details of provider: http://edirc.repec.org/data/cowleus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.