Openness, the Phillips Curve and the cost of relinquishing the currency

Frank Barry

No 200105, Working Papers from School of Economics, University College Dublin

Abstract: For a given degree of wage stickiness, there is an inverse relationship between the price-level and employment effects of a nominal shock. Various contributors to the literature on optimal currency areas have extrapolated from this to argue that the real effects of exchange rate changes are smaller for more open economies, reducing the effectiveness of the exchange rate as a macroeconomic instrument. This would imply that more open economies face steeper Phillips curve trade-offs. This proposition has been challenged empirically however. This paper employs standard small-open-economy models to analyse these issues. The propositions are shown to be correct when the non-traded sector is monopolistically competitive. Whether they are true or false under competitive conditions depends on a simple condition that may or may not be satisfied in practice.

Keywords: Openness; Phillips curve; Optimal currency area; Phillips curve; Foreign exchange rates; International trade (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2001-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://hdl.handle.net/10197/1279 First version, 2001 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:200105

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