The Relative Performance of Macroeconomic Policies under Alternative Exchange Rates with Wage Indexation and Rational Expectations: The Fleming Proposition Revisited

Ching-chong Lai and Wen-Ya Chang

Scottish Journal of Political Economy, 1990, vol. 37, issue 4, 405-15

Abstract: This paper introduces rational expectations into a version of the Fleming (1962) model and examines how the degree of wage indexation and the distinction between temporary and permanent disturbances affect the validity of the Fleming proposition regarding the relative efficacy of fiscal and monetary policy. It is found that (1) if macroeconomic shocks are unanticipated and temporary, the Fleming proposition is always invalid if money wages are completely indexed to the domestic price, the foreign price, or a combination of the two; and (2) if macroeconomic shocks are anticipated by the public, the Fleming proposition no longer holds. Copyright 1990 by Scottish Economic Society.

Date: 1990
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