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External adjustment in small open economies: Some recent experience

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  • Åkerholm, Johnny

Abstract

The paper deals with the adjustment problems that small open economies face in a financially integrated world. Particular attention is paid to the assignment of different policy instruments te the achievement different policy targets. It is concluded that the· possibilities to use monetary and fiscal policy instruments are highly dependent on the flexibility of wages and prices. It is, however, likely that monetary policy has to be increasingly geared towards the containment of inflation, while fiscal pol~cy has to secure external balance. The pessibilities to maintain employment is thus largely dependent on wage and price behaviour. The adjustment process of Australia, Denmark and Sweden is analyzed in order to shed some light on the role of the policy mix and to evaluate the importance of wage and price flexibility and the factors which influence the degree of flexibility.

Suggested Citation

  • Åkerholm, Johnny, 1988. "External adjustment in small open economies: Some recent experience," Bank of Finland Research Discussion Papers 6/1988, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1988_006
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    1. Rudiger Dornbusch, 1987. "Open Economy Macroeconomics: New Directions," NBER Working Papers 2372, National Bureau of Economic Research, Inc.
    2. Jacob A. Frenkel & Assaf Razin, 1987. "The Mundell-Fleming Model a Quarter Century Later: A Unified Exposition," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 567-620, December.
    3. Martine Durand, 1986. "Method of Calculating Effective Exchange Rates and Indicators of Competitiveness," OECD Economics Department Working Papers 29, OECD Publishing.
    4. Jeffrey Sachs, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(4), pages 731-747.
    5. Jacob A. Frenkel & Assaf Razin, 1987. "The Mundell-Flemming Model: A Quarter Century Later," NBER Working Papers 2321, National Bureau of Economic Research, Inc.
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