Wage Rigidity and Capital Mobility in an Optimizing Model of a Small Open Economy

Theo van de Klundert and Frederick (Rick) van der Ploeg

No 168, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper formulates an optimizing model of a small open economywith a representative (immortal) household, a firm and agovernment. The asset menu consists of domestic currency,non-traded bonds and traded bonds. There is a risk-premium ontraded bonds, which leads to deviations from perfect capitalmobility and UIP. Taxes are lump-sum, so that finance by bonds andby taxation are equivalent. The model allows for current-accountand wealth dynamics. There are six versions of the model dependingon whether one assumes purchasing power parity or imperfectsubstitution between home and foreign goods and on whether there islabour market equilibrium, nominal wage rigidity or real wagerigidity. For each of these variants, the steady-state effects of afiscal contraction, monetary disinflation, a worsening of thesupply side, an increase in the world interest rate, and a resourcediscovery are discussed. The transient effects of these policiesfor some of these versions are analysed with the aid of a "multipleshooting" algorithm.

Keywords: Capital Mobility; Fiscal Policy; Monetary Policy; Open Economy; Purchasing Power Parity; Wage Rigidity (search for similar items in EconPapers)
Date: 1987-03
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Related works:
Working Paper: Wage rigidity and capital mobility in an optimizing model of a small open economy (1990)
Working Paper: Wage rigidity and capital mobility in an optimizing model of a small open economy (1989)
Working Paper: Wage rigidity and capital mobility in an optimizing model of a small open economy (1987)
Working Paper: Wage rigidity and capital mobility in an optimizing model of a small open economy (1987)
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