1. Julkaisuhaku
2. Exchange Rate Policy and Employment in Small Open Economies

Exchange Rate Policy and Employment in Small Open Economies

Introduction

Employment in a large and relatively closed economy is often thought to be mainly demand determined in the short run, and the causal significance of the real wage may then be lim­ited. For small and open economies, by contrast, there is widespread agreement that the real wage matters (at least in the medium to long run). Traded goods may be sold on interna­tional markets even if domestic demand were insufficient, as the price elasticity of demand facing producers in a small economy may be taken to be high. A reduction in the real wage should in these circumstances stimulate production and employment through a number of routes: by changing relative prices and switching world demand towards domestic output, by raising profitability and encouraging increased utiliza­tion of existing capacity, by inducing investment etc. There is a presumption that large-scale and persistent unemploy­ment in a small open economy is classical in the sense of being associated with a real wage and a real value of the currency exceeding the levels compatible with full employ­ment at external balance.

• ISSN: 0357-9603
• ISBN: 951-9282-13-0