real output effects of announced monetary policy in a small open economy

Real Output Effects of Announced Monetary Policy

in a Small Open Economy

By

Betty C. Daniel

C o n t e n t s : I. Introduction. -. II. Model. -- IlI . Long- and Short-Run Equilibrium Dynamics and Monetary. Policy. -- IV. Conclusion. -- Appendix.

I. Introduction

T he view that monetary policy can affect output only to the extent

that it fools people is becoming a widely accepted economic postulate. In the Lucas [1973] version, a monetary expansion, which

increases prices, also stimulates output if people mistakenly view observed higher prices of their output as higher relative prices. In other rational expectations versions ~, expansionary monetary policy increases output only when it is not fully incorporated into labor's wage demands. Full incorporation fails to occur whenever labor's decisions are made without knowledge of current or future (in the case of contracts) monetary policy.

This postulate does not generalize unambiguously to a flexible exchange rate, open economy. This paper demonstrates that monetary policy can have short-run real output effects in a small, market-clearing economy without fooling people. Two particular characteristics of the specification of this small open economy are responsible for the short-run real output effects. First, as demonstrated by Kouri [I976 ], monetary policy has short- run real effects on the level of domestic savings and on the current account when consumption depends on real wealth and when domestic portfolios, which are composed of a non-traded financial asset (domestic currency) and a traded financial asset, are continuously in equilibrium. The assumption that domestic currency is not traded is justified on the grounds that

Remark: The author wishes to acknowledge helpful commen.ts from Dale Henderson and other members of a seminar given at the Division. of In.temational Fitxaltce, Board of Gover- nors of the Federal Reserve System. The views reflected represent those of the author and not those of the Board of Governors or its staff. Rodney Falvey, Harold Fried, William Kelly, and an anonymous referee provided valuable comments on an earlier draft. The author assumes full respon.sibility for any remaining errors. Partial financial support from the Murphy In.stitute in Political Economy is gratefully acknowledged.

~ Examples include 5argent and XVallace lx975]; Barro [I978]; Fischer [x977]; Gray

[1976].

Output Effects of Announced Monetary Policy 429

transactions costs of dealing in the small country's currency are prohibi- tively high. It implies that any central bank purchase or sale cannot be instantaneously reversed. Stocks of the traded asset can be returned to their former level only through current account changes or, equivalently, through savings. This gives monetary policy short-run real effects. Second, it is assumed that commodities produced by the domestic country are distinct from those produced in the rest of the world and that the domestic country commands a large enough portion of the market for its own commodity to affect its price and thereby its terms of trade. Thus, the domestic country is "small" in the market 1or world commodities but "large" in the market for its own commodity. This assumption is common in earlier Keynesian models [Mundell, 1968; Fleming, 1962] and in recent work by Dornbusch [I976 ], Niehans [I977], and Dornbusch and Fischer [198o]. Henderson [198o ] has shown that this assumption together with Kouri's specification imply that one of monetary policy's short-run effects is on the terms of trade 1.

The contribution of this paper is the integration of the Dornbusch [I976], Kouri [I976], and Henderson [198o] work with an equilibrium theory of employment determination. Output is shown to depend positively on the terms of trade through recognition that real wages faced by employers and workers differ. The folwner uses the price of domestic output as a deflator, and the latter uses a cost-of-living index, containing prices of domestic and foreign commodities. Under these assumptions, an open market purchase of the international asset must create a current account surplus whereby domestic residents can reacquire the long-run quanti ty of the asset. Terms of trade deterioration and a reduction in real wealth create the surplus, reducing real output in the process.

In an effort to present the argument as concisely as possible, a model is developed in which no one is fooled. Policy is simultaneously announced and executed, and all agents are free to revise any decisions. The last section of the paper contains comments about extending the analysis to account for policies with known and unknown components.

The paper is organized as follows: Section II is a presentation of the small country economy, including a fully specified labor market. Section I I I contains an analysis of expansionary monetary policy and is followed by conclusions in Section IV.

Monetary policy is defitwd here as the purchase or sale of foreign money for domestic

money.

430 B e t t y C. D a n i e l

II. Model

I. G e n e r a l D e s c r i p t i o n

The analysis focuses on a small domestic country with flexible exchange rates. The model is distinctive primarily in two aspects. First, the small country assumption together with currency substitution 1 in asset markets implies non-neutral, short-run monetary policy. Second, full specification of labor market equilibrium allows output to be endogenously determined.

Furthermore, exchange rate expectations are endogenous 2. Following Dornbusch [I976], the expected proportional rate of change of the exchange rate (E) depends on its known long-run value less its current value according to:

(I) E - - 0 ( E E - - 1 )

where 0 is the speed of adjustment a, a bar (--) represents tile hmg-run equilibrium value of a variable, a (.) represents a time derivative, and an asterisk (*) represents an expectation.

The remainder of this section contains descriptions of equilibrium in asset, goods, and labor markets. Consider, first, asset markets.

2. Asse t M a r k e t s

Currency substitution characterizes asset markets. Domestic residents hold domestic money and the world money (a convertible currency) since both are necessary for commodity transactions. Foreigners do not hold the small country's money since domestic residents accept foreign money for transactions. As a simplification, it is assumed that no assets, other than the two currencies, exist.

The two currencies are substitutable in domestic portfolios depending on relative rates of return, i.e. the expected rate of change of the exchange

s A tradeable financial asset denominated in foreign currency representing titles to a capital stock could substitute for foreign currency itself and yield the same results. The ex- pression "currency substi tut ion" is due to Girton and Roper [z981].

= The analysis abstracts from endogerxous expectations of other variables. In fact, since all variables are expected to return to their former values following a nominal shock, inclusion of expectations of these real variables would strengthen existing substi tution effects. Their omission, therefore, does not affect the qualitative analysis.

= Consistency of these expectations with rational expectations requires that 0 equals the actual adjustment speed. The latter is assumed to be the stable root of the two differential

equations in. E and F. See p. 434, footnote.


rate. Portfolio balance requires that foreign currency (EF) be held in the appropriate proportion to domestic currency (M) according to:

(2) 0 - 1

where V is functional notation and ,r(0) represents the long-run proportion of foreign to domestic money. Defining the exchange rate (E) as the domestic currency price of foreign exchange (F) implies "f > 0. A higher expected rate of increase of the price of foreign currency implies a greater rate of return inducing greater demand.

3. Domest ic C o m m o d i t y and Labor Markets

The significant features of the goods market are endogenous terms of trade and endogenous domestic output. The domestic country is completely specialized in the production of a commodity different from that produced in the foreign country. Furthermore. the domestic country is large enough in the market for its own good to affect total aggregate demand for the domestic commodity. The supply of the domestic commodity is derived from conditions of labor market equilibrium. The level of domestic production and the price of the domestic commodity are therefore determined simultaneously by domestic and foreign demand and by domestic aggregate supply. The foreign currency price of the foreign commodity is exogenous to domestic residents.

Demand for the domestic good is assumed to depend positively on total domestic spending and negatively on the relative price of the domestic good (P/E), hereafter referred to as the terms of trade. The foreign currency price of the foreign good is normalized at unity. Total domestic spending is assumed to depend positively on real wealth (a). Real wealth is defined as the domestic currency value of domestically- held assets (M + EF) deflated by a consumer price index, which contains domestic currency prices of the domestic and foreign good. Real demand for the domestic good can therefore be expressed as:

(3) D = D (P/E, a)

Domestic output (Y) depends positively on the quantity of labor (L). Labor's marginal product is positive and diminishing.

(4) Y = y ( L ) y' > 0 y" < 0

4 3 2 B e t t y C. D a n i e l

Determination of L requires explicit consideration of the labor market. The demand for labor by profit maximizing firms (L d) depends negatively on the real wage in terms of the products they produce. The real wage from the producers' point of view is the nominal wage (W) deflated by the price of domestic output, implying:

(5) L d = L d ( w / P )

Labor supply is assumed to depend positively on the real wage in terms of the commodities workers consume. A higher purchasing power of the current nominal wage, i.e. the nominal wage deflated by a price index containing domestic and foreign commodities 1, induces current substitution of labor for leisure. Finally, an increase in the stock of real assets reduces the marginal utility of additional labor services reducing labor supply. However, these wealth effects are felt to be relatively minor in comparison with the real wage effect, and are therefore relegated to foot- notes. Labor supply can be written as:

(6) L s = L s (w)

where w is the purchasing power of the nominal wage, i.e. the nominal wage deflated by the price index.

I t is now possible to determine the equilibrium quanti ty of labor as a function of the domestic price (P) and the exchange rate (E). An increase in P creates a proportionate increase in the nominal wage (W) employers are willing to pay for a given quanti ty of labor services. However, the increase in P creates a less than proportionate increase in the cost of living (for a given E). This in turn induces a less than proportionate increase in the nominal wage workers require for a given quanti ty of services. Main- tenance of labor market equilibrium following a rise in P requires a less than proportionate increase in the nominal wage and an increase in employment. The real wage from the employers' point of view (W/P) falls and the real wage from workers' point of view (w) rises, stimulating more employment.

Consider the effect of an increase in the exchange rate on employment. From equation (5), the exchange rate does not affect the wage an employer is willing to pay for a given quanti ty of labor services. The exchange rate does affect workers' decisions since it changes the cost of living. A higher exchange rate causes workers to demand a higher nominal wage in an

Salop [1974] and Leidermann [1979] have also emphasized that labor's real wage differs from the producer's real wage in an open economy and that equilibrium output there-

fore depends on the terms of trade.


effort to achieve the same real wage tor each quanti ty of labor services. Thus, following an increase in E, maintenance of labor market equilibrium requires a higher nominal wage and a reduction in employment. The real wage from the employers' point of view (W/P) rises and from the workers' point of view (w) falls, reducing employment.

Finally, proportionate increases in the price (P) and the exchange rate (E) create a proportional increase in the cost of living and in the nominal wage, leaving employer's and worker's real wages unaffected. Employment can therefore be expressed as a positive function of the terms of trade 1.

Substituting into equation (4), output can be expressed as a positive function of the terms of trade according to:

(7) Y = Y (P/E)

Goods market equilibrium requires output produced to equal output de- manded according to:

(8) D (P/E, a) - - Y (P/E) -- 0

4. C u r r e n t A c c o u n t a n d C a p i t a l F lows

The dynamics of the system are determined by tile current account and capital flows. With flexible exchange rates, the current account identically determines net capital flows. Given the specification of the goods market, net exports depend negatively on the terms of trade and real wealth. An increase in the relative price of domestic goods reduces net exports given satisfaction of tile NarshaU-Lerncr condition. Higher real wealth stimulates domestic spending thereby reducing net exports.

Capital flows (E/~') can therefore be expressed as:

(9) EI; = NX (P/E, a) NX 1 < 0 NX~ < 0

where NX represents net exports evaluated in domestic currency.

IH. Long- and Short-Run Equilibrium Dynamics and Monetary Policy

I. L o n g Run

In the long run, rates of changes of all variables are zero and expected values equal actual values. This implies that the current account is zero and that capital flows have ceased. M is the exogenous policy variable. From equations (2) and (8), it is clear that an increase in M accompanied

Inclusion of real wealth in labor supply would make output a negative function of real wealth, as well.

434 Betty C. Daniel

by proportionate changes in the long-run levels of price (P) and the exchange rate (1~) and by no change in tile long-run stock of foreign currencies (F) leaves tile terms of trade, real output, and real wealth unaffected, thereby maintaining equilibrium. Thus, M determines P and/~3, and ~' is completely exogenous to the model.

2. S h o r t - r u n E q u i l i b r i u m a n d D y n a m i c A d j u s t m e n t

Figure I is useful for describing short-run equilibrium and dynamic adjustment. In the short run, the exogenous variables are F, M, and 1 ~. Figure I describes asset market equilibrium (AA), goods market equilibri-

Figure I

F u

\A r

Y Y0 F 0 E

um (YY), and capital flows (1; 3 as functions of the stock of foreign assets, F. Beginning from a point of full long-run equilibrium, imagine an increase in F. Portfolio balance (equation (2)) requires that the exchange rate falls along AA, increasing the expected rate of return on F and reducing its value in domestic currency. The effect on the excess demand for domestic goods and therefore on the price of domestic output (P) is ambiguous. The higher F directly increases wealth, stimulating demand. I-Iowever, as a requirement for portfolio balance, the higher F reduces E. The lower exchange rate creates excess supply by increasing output and reducing demand. Thus, price could either rise or fall. However, if it falls, it falls by less than E since equiproportionate declines in P and E do not affect supply and leave real wealth higher, creating excess demand. Therefore, an increase in F improves the terms of trade, stimulating supply, and increases real wealth, stimulating demand 1. Output rises along YY.

1 Real wealth must rise to stimulate the demand for the higher supply of output implied by improved terms of trade. Thus, the etteet of real wealth in the labor supply function is assumed to be dominated.

Output Effects ot Announced Monetary Policy 435

A description of the dynamics of the system requires determination of capital flows. Long-rnn equilibrium occurs when net exports equal zero,

along i r -~ 0. The higher F increases wealth, reducing net exports, and increases excess demand for domestic commodities, putting upward pressure on their price, further reducing net exports. E must rise to return the current account to long-run equilibrium. Whenever F is above

= 0, E is relatively low, providing the positive expected rate of return on F and the lower domestic-currency value of foreign assets necessary for portfolio balance. The b.igher terms of trade consistent with the relatively high F and low E create a current account deficit and negative capital

acquisitions along AA. Similarly, when F is below 1 ~ ----- 0, the current account is in surplus implying positive capital acquisitions along AA.

Finally, consider the effect of an increase in the domestic money supply. The long run values of the exchange rate and the price level rise proportionately. Portfolio balance (equation (2)) requires the exchange rate

to rise to its long-run level immediately. This would shift AA and F = 0 right in Figure I in proportion to the monetary expansion. From equation (8), the price also rises immediately to its long-run level. Since the terms of trade and real wealth are unaffected, there are no output effects or capital flows.

3- M o n e t a r y P o l i c y

It is now possible to analyze monetary policy in the form of foreign exchange market intervention. The domestic monetary authority purchases foreign assets with domestic money. Since the small country's money is not internationally traded, domestic residents cannot instantaneously restore stocks to their forn~er levels. In Figure 2 the higher stock of

Figure z

F A' ~=0

A (~-0)"

FI _ F> 0

___--F~ ,. ~ , ~ : > | I , \ I . . . r \ ~ I - a ' I I I " t ~ l I

y, E 0 ~" E' E


money shifts AA and i; = 0 to the right proportionately. The stock of F falls to F'. Portfolio balance is maintained by an increase in E to E' beyond the new higher long-run equilibrium ]~.

Tile higher exchange rate induces substitution onto domestically-produced commodities, but the price of domestic output does not rise proportionately. Proportionate increases in the domestic price and the exchange rate would reduce real wealth creating excess supply of the domestic good. The terms of trade therefore deteriorate and output fails along YY to Y'.

The rise in E and the fall in F stimulate net exports contributing to positive domestic acquisition of foreign assets. As foreign assets are ac- quired, the expected rate of change in the exchange rate and the exchange rate fail, and output returns to its former level~.

The nature of the output effect deserves some comment. Since full information prevails and all markets clear, the output movements are equilibrium movements. Involuntary unemployment is not affected. Mone- tary policy disturbs labor's work-leisure trade-off, creating short-run equilibrium movements of output about the long-run level. This is a previously undiscussed short-run effect of monetarv policy, on output. Stabilization of output requires that the authority forego discretionary monetary policy, which is equivalent in this analysis to abandoning attempts to manage the exchange rate.

I t should be emphasized that the real output effects do not stem from fooling people. Generalization of these results to a model with incomplete information is straightforward. Extension of the Lucas aggregate supply story to an open economy, as in Parkin [r97812, demonstrates that an unanticipated rise in the price of domestic goods stimulates output while a deterioration in the terms of trade tends to reduce output. Thus, to the extent that unanticipated monetary policy raises nominal prices, output tends to rise, but to the extent that it deteriorates the terms of trade,

Perfect foresight requires that variables coltverge to their long-ruu values at the rate at which they are expected to converge. This requires that the actual adjustment speed equals 0. The stable root of the resulting quadratic yields the value of 0 consistent with perfect foresight.

Parkin's extension of the Lucas aggregate supply story to an open economy yields:

y =: " ~ 0 t { P - - P ) + ' ~ , u ( l - - t ) [ P - - ( P * + E)I

where y is the slope of the aggregate supply curve, 0 is the ratio ot relative price vo.riance. aad u is the ratio of the variance of relative domestic prices to the total iuteraatiortal variance of prices, t is the weight on domestic prices in the consumer price index. ~' is the expected price, and p* is the expected foreign currency price. Unexpected money could cause P to rise above p, but maintenaxtce of portfolio balance causes E to rise. An increase in I." is accompanied by a deterioration of the terms of trade due to the wealth effect in the goods

market. The net output effect is ambiguous.


output tends to fall. Monetary policy with incomplete information has an ambiguous effect on output.

This generalization contains an important policy implication for small open economies. Flexible exchange rates have long been heralded as giving more freedom to domestic monetary policy. A small country can control its money supply under flexible rates whereas it cannot under fixed rates. Flexible rates presumably free monetary policy for use in influencing domestic economic variables. I~owever, this analysis demonstrates that the terms of trade deterioration, created by expansionary monetary poficy, could offset the closed economy type output effects of unexpected monetarv expansion.

IV. Conclusion

This analysis demonstrates that announced expansionary, monetary policy has contractionary short-run effects on equilibrium output. The source of tile non-neutrality is the small country assumption that foreigners do not accept the small country's money as means of payment. An open market increase in the money supply must be effected by inducing residents to hold fewer foreign assets in the short run. Since monetary policy does not have long-run real effects and since foreigners do not accept domestic money, the stock of foreign assets can be reaccumulated only through a current account surplus. The surplus requires real changes.

One of tile real changes is tile effect on output. The full employment level of output is a positive function of the terms of trade, reflecting an improved work-leisure trade-off. Full employment is maintained, but the full employment level of output changes with the terms of trade, an effect necessarily absent from a closed-economy model.

The analysis has important implications for the ability of a small country to conduct discretionary monetary policy. In a neo-classical world, discretionary monetary policy is effective in influencing output to the extent that is unexpected, either currently or when labor contracts were negotiated. In an open economy, the positive output effect of unexpected money must offset the negative effect, caused by terms of trade deterioration, for output to increase. Although flexible exchange rates give the domestic monetary authority the ability to control the money supply, discretionary monetary policy has an unreliable effect on output.


A p p e n d i x

The a p p e n d i x p rov ides a r igorous de r iva t i on of t he r educed form of t he mode l by so lv ing for t he e n d o g e n o u s va r i ab les as f u n c t i o n s of F a n d M. I t also solves for the s h o r t - r u n effect of t he m o n e t a r y po l icy a n a l y z e d in the t ex t .

z. Model and Jacobian (short-run)

(2) ~i- + Y 0 - - 1 = 0 (7) Y ( P / E ) - - Y = 0

(8) D (P /E , a) - - Y (P/E) = 0 (9) N X (P /E , a) - - E~" = 0

Pa r t i a l de r iva t ives are deno t ed b y subsc r ip t s excep t for t he pa r t i a l de r iva t i ve of y w i th r e spec t to t he expec ted change in t he e x c h a n g e rate . I t is deno t ed y ' . T is used

as a subsc r ip t for t e rms of t r a d e (P/E). In i t i a l ly P = E = 0 I~" = 0, a n d Y = D. p = t P + ( l - - t ) E, where t is t he e x p e n d i t u r e share weight , u sed to c o n s t r u c t t h e pr ice index , 9.

j =

m

F - - ~ - - y ' 0 E-- ~

P - - D T ~ + Da a E

P - - YT E~

P - - N X . r ~ + N X . a E

0 0 0

1 D T ~ - + Da ap - - 1 0

1 YT E- - - 1 0

1 N X T ~ - + N X a a p 0 - - E

i J~ = - - + T ' 0 - - D T ~ - - - D a a P

2. Exogenous Change in F

dE

d F

d P

j d F

d Y

d F

dk d F

E

m D a

0

- - N X a

d E - - E ~

d ~ - - E F + y ' 0 (t~/E) < 0

d P d E Da [(A/M) + T' 0 (~4E)] + d E d F [ J I

d E > m d F


The price level t e n d s to fall as t he e x c h a n g e ra te falls, b u t t e n d s to rise due to the d i rec t wea l th effect of a h ighe r F. The ne t m o v e m e n t is amb iguous .

1 YT Da [(A/M) + y ' 0 (g/E)]

dY p

d F J :

1 d F [NXT Da - - NXa (DT - - YT)] [(A/M) + T" 0 (if,/E)] pa

d~ . . . . . I J . . . . . . . . . . . < o

g u a r a n t e e i n g t h a t t he s y s t e m is s table.

3. Exogenous Change in M," Ini t ial ly , E = -E

dE

d~ d P

dM

d Y

d F

m

E F

M 2

1 - - D a -

= P

0

1 - - N X a ....

P

1 -

V ' 0 M

q

The s u m of the first two c o l u m n s of the J acob i an m a t r i x mul t ip l i ed by p/M equa l s the vec to r for m o n e y supp ly change above.

dE E d P P dY d F = 0 - - - = 0

dM M dM M dM dM

4. Exchange Marke t Intervention Policy Denoted by X where d M = - - E d F ; Ini t ia l ly E = ~

d E

dY

d X

d F

d X

A 1

0

d E

-dX-- 1 + M E F + y ' 0 M > 0

440 Be t tv C. Daniel

The short-run exchange rate must rise above its new long-run level (E/M)

by EF a_ y, 0 M ~{-

1 - - Da {A/M + y'O) dP dE p dE

d X - = ,1~ . . . . . . j < , i x

The price level rises by less than the exchange rate and could even fall if the wealth effect is strong enough.

1 - - -~ YT Da (A/M ~- y' O) dY

P

dX j < o

1 dl ~. [ - - N X TDa + NXa (D T - YT) ] [A/M + T'0] ps

. . . . . . . . . . . > 0 dX j

R e f e r e n c e s

Barro, Robert J., "Unanticipated Money, Output, and the Price Level in the United States". Journal o/ Political Economy, Vol. 86, Chicago, 1978, pp. 549--580.

Cairn, GuiUermo A., and Carlos A. Rodriguez, "A Model of Exchange Rate Deter- mination under Currency Substitution and Rational Expectations". Journal o/ Political Economy, Vol. 85, Chicago, r977, Pp. t~17--625.

Dornbuseh, Rudiger, "Expectat ions and Exchange Rate Dynamics". Journal o/ Political Economy, Vol. 84, Chicago, I976, pp. i I61--1176.

- - , and Stanley Fischer, "Exchange Rates and the Current Account". The American Economic Review, Vol. 7 o, Menasha, 198o, pp. 96~<77 I

Fischer, Stanley, "Wage Indexation and Macroeconomic Stability". In : Karl Brunner and Allan H. Meltzer (Eds.), Stabilization o/the Domestic and INternational Economy. Carnegie-Rochester Conference Series on Public Policy, Vol..5, Amsterdam, 1977, pp. 1o7--x47.

Fleming, J. Marcus, "Domestic Financial Policies under Fixed and under Floating Exchange Rates". IMF, Staff Papers, Vol. 9, Washington, 1962, pp. 369--379.

Girton, Lance, and Don Roper, "Some Implications of Currency Substitution for Monetary Control". Journal o/ Money, Credit, and Banking, Vol. 13, Columbus, 1981, pp. 12--3o.

Gray, Jo A., "Wage Indexation : A Macroeconomic Approach". Journal o/Monetary Economics, Vol. 2, Amsterdam, 1976, pp. 221--235.

Henderson, Dale W., "The Dynamic Effects of Exchange Market Intervention Policy: Two Extreme Views and a Synthesis". In: The Economics o/ Flexible Exchange Rates. Proceedings of a Conference at the Institute for Advanced Studies, Vienna, 29---31 March 1978, Beihefte zu Kredit and Kapital, H. 6, Berlin, 198o, pp. 156 to 209.


Kouri, Pentti J. K., "The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach". The Scandinavian Journal o/ Eco~2omics, Vol. 78, Stockholm, 1976, pp. 28o--3o 4.

Leiderman, Leonardo, "Expectat ions and Output-Inflation Tradeoffs in a Fixed- Exchange-Rate Economy". Journal o/ Political Economy, Vol. 87, Chicago, 1979, pp. 1285--13o0.

Lucas, Jr., Robert E., "Some International Evidence on Output-Inflation Tradeoffs". The American Economic Review, Vol. 63, Menasha, 1973, PP. 326--334 �9

Mundell, Robert A., International Economics. New York, 1968.

Niehans, Jftrg, "Exchange Rate Dynamics with Stock]Flow Interaction". Journal of Political Economy, Vol. 85, Chicago, 1977, PP. 1245--1257.

Parkin, Michael, The Lucas Aggregate Supply Story Extended to the Open Economy. Department of Economics, University of Western Ontario, September I078. un- publ.

Salop, Joanne, "Devaluation and the Balance of Trade under Flexible Wages". In: George Horwich and Paul Samuelson (Eds.), Trade, Stability and Macroeconomics. Essays in Honor of Lloyd A. Metzler. Economic Theory and Mathematical Econo- mics, New York, 1974, pp. 129--157.

Sargent, Thomas J., aml Nell Wallace, " 'Ra t iona l ' Expectations, the Optimal Mone- tary Instrument, and the Optimal Money Supply Rule". Journal o/ Political Economy, Vol. 83, Chicago, 1975, pp. 241--254.

Z u s a m m e n I a s s u n g : Produktionseflekte einer vorangektlndigten Geldpolitik. - - Diese Untersuchung zeigt, dab eine angekl~ndigte expansive Geldpolitik in einer kleinen offenen Volkswirtschaft kontraktive kurzfristige Auswirkungen auf die Gleich- gewichtsproduktion hat. Dieses Ergebnis beruht auf dem Vorhandensein gehandelter und nichtgehandelter Wertpapiere, auf einer vollstAndigen Spezialisierung in der Produktion und auf einem Arbeitsangebot, das yon der Kaufkraft der L0hne, die u. a. aus den Preisen inlitndischer nnd importierter Erzeugnisse abgeleitet wird, ab- b~ingt. Eine monetiire Expansion aufgrund des Ankaufs yon Wertpapieren durch die Zentralbank verschlechtert die heimischen Terms of Trade. Das vermindert das Ar- beitsangebot bei jedem vom Preis inlfi_udischer Produkte abh/ingigen Reallohn, li~Bt abet die Nachfrage nach Arbeit unver~kndert. Gleichgewichtsbeschiiftigung und -produktion gehen zurllck.

R~su m C: Les effets de production d'une politique monCtaire annoncCe. - - Cette analyse dCmontre que l 'expansion mon~taire annoncCe a des effets restrictifs A court terme sur la production d'~quilibre dans une petite 6conomie ouverte. La non- neutralit6 s'appuie sur la presence des actifs financiers commercCs et pas commercCs, sur la Sl~cialisation complete dans la production et sur une offre de travail qui d~pend du pouvoir d 'achat des salaires d~rivC, d 'nne pattie, des prix des biens locaux et import~s. L'expansion monCtaire, rCalisCe par des achats de l 'actif commerc6 de

Weltwirtsehaftliches Archly Bd. CXVII. 30

442 B e t t y C. Daniel Output Effects of Announced Monetary Policy

la part de la banque centrale, aggrave les termes de l'6change locaux. Cela r6duit l'offre de travail A chaque taux de salaire r~el d6riv6 du prix des bien locaux et n'influence pas la demande de travail. L'emploi et la production d'~quilibre diminuent.

R e s u m e n : Efectos de producto reales de una polftica monetaria anunciada. - - Este an~lisis demuestra que una expansi6n monetaria anunciada tiene efectos de corto plazo contractivos sobre el producto de equilibrio en una economia pequefia y abierta. La no neutralidad se debe a la presencia de activos financieros transables y no transables, completa especializaci6n en la producci6n y, una oferta de trabajo, que depende del poder de compra de los salarios por productos importados y producidos dom6sticamente. La expansi6n monetaria, definida como la compra del banco central de activos transables, deteriora los t~rminos del intercambio dom6sticos. Esto reduce la oferta de trabajo para cada salario real en t6rminos del precio de bienes producidos dom6sticamente y deja la demanda por trabajo inalterada. E1 empleo y producto de equilibrio caen.

real output effects of announced monetary policy in a small open economy

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