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

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  • Frank Barry

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.

Suggested Citation

  • Frank Barry, 2001. "Openness, the Phillips Curve and the cost of relinquishing the currency," Working Papers 200105, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:200105
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    File URL: http://hdl.handle.net/10197/1279
    File Function: First version, 2001
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    Cited by:

    1. Marcelo Sánchez, 2008. "Implications of Monetary Union for Catching-up Member States," Open Economies Review, Springer, vol. 19(3), pages 371-390, July.

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    More about this item

    Keywords

    Openness; Phillips curve; Optimal currency area; Phillips curve; Foreign exchange rates; International trade;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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