NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Openness, Relative Prices and Macro Policies

Joshua Aizenman

NBER Working Paper No. 1233 (Also Reprint No. r0635)
Issued in November 1983
NBER Program(s):   ITI   IFM

This paper analyzes the role of relative prices in the conduct of wage indexation and monetary policy in a small economy producing traded and non-traded goods under a flexible exchange rate regime. It is shown that the beneficial effect of using relative prices in addition to aggregate prices as indicators for the conduct of the above policies increases with openness. The response of policies to relative prices rises with openness,and has dampening effects on the volatility of deviations from purchasing power parity. The analysis demonstrates that the beneficial effect of allowing a"basket" indexation (or a money rule that responds also to relative prices) lies in mitgating the effects of foreign shocks.

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Document Object Identifier (DOI): 10.3386/w1233

Published: Aizenman, Joshua. "Openness, Relative Prices and Macro-Policies." Journal of International Money and Finance, Vol. 4, No. 1, (March 1985), pp. 5-17. citation courtesy of

 
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