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Open-Economy Implications of Two Models of Business Fluctuations

Alan C. Stockman, Ai Tee Koh

NBER Working Paper No. 1317
Issued in March 1984
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w1317

Published: 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. citation courtesy of

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