Open-Economy Implications of Two Models of Business Fluctuations

Alan Stockman and Ai Tee Koh

No 1317, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows how open-economy implications of alternative business-cycle models can be used to discriminate between those models. Open-economy versions of two well-known models are presented: a model with predetermined nominal wages and a model in which nominal disturbances are misperceived as real disturbances. In the former model applied to a small economy with flexible exchange rates, an unanticipated increase in the money supply increases output of both traded and nontraded goods, lowers the relative price of nontraded goods, and inducesa current-account surplus. In the latter model, an unperceived increase in the money supply increases output of nontraded goods but reduces output of traded goods, raises the relative price of nontraded goods, and induces a current-account deficit.

Date: 1984-03
Note: ITI IFM
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Published as Koh, Ai Tee and Alan C. Stockman. "Open-Economy Implications of Two Modelsof Business Fluctuations," Canadian Journal of Economics, Vol. XIX, No. 1 , February 1986, pp. 23-34.

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Journal Article: Open-Economy Implications of Two Models of Business Fluctuations (1986)
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