A Fix-Price Trade Model with Perfect Capital Mobility: Fixed versus Flexible Exchange Rates
1983 (English)Report (Other academic)
This paper extends the two-sector analysis of macroeconomic policies in temporary equilibrium with quantity rationing to include both money and internationally traded bonds as financial assets. By eliminating the assumption that money is the only asset, an acceptable treatment of flexible exchange rate regimes becomes possible. The efficacy of Monetary, fiscal, and wage policies is compared under alternative non-market-clearing regimes and exchange rate systems. Noteworthy is the dramatic differences in the sectoral output effects of fiscal policy under different unemployment and exchange rate regimes. It is demonstrated that the use of the well-known Mundell-Fleming model, which presumes a simple (one-sector) Keynesian unemployment structure, when an economy is in fact suffering from classical unemployment could lead to major policy errors. Most strikingly, increased government spending is shown to be contractionary in the presence of classical unemployment under flexible exchange rates. This is a consequence of the adverse effect of the resulting exchange rate appreciation on the tradeable goods sector.
Place, publisher, year, edition, pages
Stockholm: IIES , 1983. , 39 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 239
IdentifiersURN: urn:nbn:se:su:diva-41468OAI: oai:DiVA.org:su-41468DiVA: diva2:330382
Published in connection with a visit at the IIES2010-07-152010-07-152010-07-15