Sectoral Conflict over Stabilization Policies in Small Open Economies

Martin Prachowny

Working Paper from Economics Department, Queen's University

Abstract: A small open economy is characterized by a two-sector model with tradables and non-tradables. Stabilization policies typically have unequal effects on these two sectors and expansion of total output often requires contraction in one sector. Such situations make difficult obtaining effective consensus on the appropriate stabilization policy. Expansionary fiscal policy requires a contraction in one sector after the labour market adjusts to the disturbance; monetary policy is ineffective under fixed exchange rates and may not have sectoral conflict under flexible exchange rates. Sectoral conflict can be eliminated by designing policy combinations that maintain a given relative price of nontradables.

Pages: 31
Date: 1979
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Journal Article: Sectoral Conflict over Stabilisation Policies in Small Open Economies (1981)
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