IDEAS home Printed from
   My bibliography  Save this paper

Real and Monetary Disturbances in an Exchange-Rate Union


  • Richard C. Marston


This paper investigates how a small country fares in an exchange-rate union if that country is subject to real and monetary disturbances originating at home and abroad. By joining a union, the country can fix the exchange rate between its currency and the currency of another country or countries. The paper asks whether or not fixing this exchange rate helps to modify the effects of disturbances on the domestic economy. This question is investigated within a model consisting of an aggregate demand equation dependent upon the terms of trade, an aggregate supply equation in which labor supply is responsive to the general price level, and a financial equation that determines the exchange rate of the domestic currency relative to one of two foreign currencies (the other being determined by triangular arbitrage) . Aggregate supply behavior varies depending upon whether wages respond to prices with a lag or are indexed to current changes in the general price level. Because the small country model cannot be used by itself to analyze the effects of foreign disturbances, the paper introduces models of two foreign countries with the same analytical structure as the domestic country model. Foreign disturbances are studied in two stages, first within the foreign model, then within the domestic model. The analysis shows that one of the most important factors determining the effects of the union is the degree of wage indexation in the domestic economy. The greater the degree of indexation, the less difference there is between output variation in the union and in a flexible regime. Apart from wage behavior, two other factors are important: the sources of the disturbances and the pattern of trade. Contrary to common belief, the case for a union is not necessarily strengthened if disturbances primarily originate outside the union and if the domestic country trades primarily with other members of the union.

Suggested Citation

  • Richard C. Marston, 1981. "Real and Monetary Disturbances in an Exchange-Rate Union," NBER Working Papers 0705, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0705
    Note: ITI IFM

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    2. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 105(1), pages 48-65, September.
    3. Jeffrey D. Sachs, 1979. "Wage indexation, flexible exchange rates, and macro-economic policy," International Finance Discussion Papers 137, Board of Governors of the Federal Reserve System (U.S.).
    4. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
    5. Robert P. Flood & Nancy Peregrim Marion, 1980. "The Transmission of Disturbances under Alternative Exchange-Rate Regimeswith Optimal Indexing," NBER Working Papers 0500, National Bureau of Economic Research, Inc.
    6. Richard C. Marston, 1980. "Exchange-Rate Unions and the Volatility of the Dollar," NBER Working Papers 0492, National Bureau of Economic Research, Inc.
    7. Marston, Richard C., 1980. "Cross country effects of sterilization, reserve currencies, and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 10(1), pages 63-78, February.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Richard C. Marston, 1981. "Wages, Relative Prices, and the Choice between Fixed and Flexible Exchange Rates," NBER Working Papers 0793, National Bureau of Economic Research, Inc.

    More about this item


    Access and download statistics


    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:nbr:nberwo:0705. 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: (). General contact details of provider: .

    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.