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Rational Expectations, Structural Unemployment and the Optimal Exchange Rate

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  • Jon Harkness

Abstract

This paper considers the optimal degree of exchange market intervention for a small open economy (SOE). The SOE includes a labour market with a wage-contracting scheme and structural unemployment, a traded and a non-traded goods sector, and a financial sector with perfect capital mobility. The intervention strategy is chosen to stabilize sectoral unemployment rates and final prices. The conventional practice of "leaning against the wind" is appropriate only when the cost of unemployment in the traded sector is inordinately large and/or when supply shocks are highly variable.

Suggested Citation

  • Jon Harkness, 1983. "Rational Expectations, Structural Unemployment and the Optimal Exchange Rate," Working Paper 526, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:526
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