Reviving the Salter-Swan small open economy model

This paper provides microfoundations to the Salter-Swan policy framework, a graphical apparatus designed ascertain exchange-rate and fiscal stance of policymaker with internal external economic targets. The environment is an infinite-horizon small open economy producing tradable nontradable goods that takes world prices interest rates as given populated by optimizing households firms. subject terms trade, rate, discount factor shocks. target government unemployment rate current account. Downward nominal wage rigidity financial frictions serve rationale for meaningful intervention.