Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity

Constantino Hevia and Juan Pablo Nicolini

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We study a model of a small open economy that specializes in the production of com- modities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consump- tion, as long as there is a signi?cant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally de?ned in the paper - that resembles a "dirty ?oating" regime can approximate the optimal policy remarkably well.

Pages: 39 pages
Date: 2015-06
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (9)

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Related works:
Chapter: Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity (2015)
Working Paper: Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2015_4

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