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Import Competition and Macro Economic Adjustment under Wage-Price Rigidity

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  • Michael Bruno

Abstract

The paper analyzes the problem of short-term adjustment to a fall in the price of competing imports when thee is wage and price rigidity. This is done in terms of a two-sector model which incorporates a domestically producible import good and a semi-tradeable home good. The effect of a fall in import prices on domestic employment, prices and the balance of payments under nominal or real wage rigidity is analyzed in the various market disequilibrium regimes. The possible responses in terms of demand management and exchange rate (or tariff) policy as well as supply management are analyzed. The theory is then applied to the stagflationary environment of the 1970s within a modified framework in which the price of imported raw materials has simultaneously risen. This helps to show how the above adjustment problem crucially depends on the nature of the underlying macroeconomic environment.

Suggested Citation

  • Michael Bruno, 1980. "Import Competition and Macro Economic Adjustment under Wage-Price Rigidity," NBER Working Papers 0522, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0522
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    File URL: http://www.nber.org/papers/w0522.pdf
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    References listed on IDEAS

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    1. Helpman, Elhanan, 1976. "Macroeconomic Policy in a Model of International Trade with a Wage Restriction," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 262-277, June.
    2. Brecher, Richard A, 1978. "Money, Employment, and Trade-Balance Adjustment with Rigid Wages," Oxford Economic Papers, Oxford University Press, vol. 30(1), pages 1-15, March.
    3. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
    4. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    5. J. Peter Neary, 1980. "Nontraded Goods and the Balance of Trade in a Neo-Keynesian Temporary Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 403-429.
    6. Hanoch, Giora & Fraenkel, Mordechai, 1979. "Income and Substitution Effects in the Two-Sector Open Economy," American Economic Review, American Economic Association, vol. 69(3), pages 455-458, June.
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    Cited by:

    1. Pentti J.K. Kouri, 1982. "Macroeconomics of Stagflation under Flexible Exchange Rates," NBER Working Papers 0868, National Bureau of Economic Research, Inc.

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