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

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Title: Openness, the Phillips Curve and the cost of relinquishing the currency
Authors: Barry, Frank
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Date: Mar-2001
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.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Keywords: OpennessPhillips curveOptimal currency area
Subject LCSH: Phillips curve
Foreign exchange rates
International trade
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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