Unemployment and optimal currency intervention in an open economy

Fair Wages and Unemployment in a Small Open Economy

In this paper we develop a model of a multi-sector multi-factor small open economy with involuntary unemployment due to fair wages. The model is used inter alia to analyse the labour market effects of changes in unemployment benefits and the domestic labour supply. Our analysis covers both the case where factor prices do not react to endowment changes – as in the Heckscher-Ohlin model – and the...

Monetary Policy, Currency Unions and Open Economy Macrodynamics

Welfare Gains from Disination in an Economy with Currency Substitution

This paper builds a general equilibrium model with working capital and currency substitution and uses this model to assess welfare gains from disin‡ation. It is found that welfare gains from disin‡ation are higher when the baseline in‡ation rate and the elasticity of substitution between foreign currency and domestic deposits are higher. Indeed the gains from disin‡ation can be quite large comp...

An Economy with Personal Currency: Theory and Experimental Evidence

Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the mar...

Optimal Fiscal Policy and Amplification in a Small Open Economy∗

We study optimal fiscal policy in a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. Our main contribution is to show that in this environment, the best sustainable policy can amplify and prolong shocks to output. In particular, the government’s credibility not to expropriate foreign capital endogenousl...