A GENERAL FRAMEWORK FOR THE MACROECONOMIC ANALYSIS OF MONETARY UNIONS *

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1 A GENERAL FRAMEORK FOR THE MACROECONOMIC ANALYSIS OF MONETARY UNIONS Ocar Bajo-Rubo Carn Díaz-Roldán Januar Abtract Th objctv o th ar to dvlo a gnral rawork or th acroconoc odllng o ontar unon whch could b uul or olc anal a wll a or tachng uro. Our tartng ont wll b th tandard twocountr Mundll-Flng odl wth rct catal oblt xtndd to ncororat th ul d and odd o that th on arkt coon or two countr orng a ontar unon. Th odl rntd n two vron: or a all and a bg ontar unon rctvl. Atr olvng ach odl w wll drv ultlr or ontar ral (.. dand-d) ul and xtrnal hock ang a cal attnton to th dtncton btwn trc and atrc hock. A grahcal anal alo rovdd. Th ar wa coltd durng th author vt to th Dartnt o Econoc at Oxord Unvrt. would lk to thank th ol at th Cntr or Intrnatonal Macroconoc or thr hotalt a wll a th Sanh Mntr o Educaton or nancal uort through th Projct PB98-56-C-.

2 . Introducton Th conct o ontar unon ha acqurd a rnwd ntrt n lat ar a llutratd b th rcnt oraton o th o-calld Econoc and Montar Unon (EMU) b br countr o th Euroan Unon. Th oblt o advancng toward a ontar unon alo bng dcud n othr ntgratd conoc ara uch a MERCOSUR or NAFTA. Fro anothr ont o vw tablhng a ontar unon ha vn bn uggtd a an altrnatv to a t o xd xchang rat. A wll known rcnt xrnc (uch a th cr o th Euroan Montar St n or th ca o Mxco and th South-Eatrn Aan countr at th nd o 99 and 997 rctvl) hav hown th ncrang dcult or a countr to buld th rutaton ndd to utan a xd xchang rat t. Th ultat raon th ctacular growth o world catal arkt ollowng th contnuou lbralzaton and drgulaton o catal ovnt that occurrd n lat ar. So a govrnnt coro o antanng a crtan xchang rat not blvd a crdbl b nancal arkt hug culatv attack wll tak lac o that cntral bank wll nd xtrl dcult to rond to a culatv attack at uch a av cal. All th ha ld to o author (. g. Obtld and Rogo 995) to uggt that n th nar utur th choc acd b a countr would b thr antanng a lxbl xchang rat or adotng a coon currnc rathr than a xd xchang rat wth othr rlatd countr. Howvr acroconoc odl o ontar unon ar not vr rqunt n th ltratur. Indd ontar unon ar not rorl dcrbd b thr a xd or a lxbl xchang rat t o that a cc rawork would b rqurd. Th raon that on th on hand th oraton o a ontar unon an th adoton o th a currnc or all th countr concrnd (whch aount to tablhng a xd xchang rat btwn th coon currnc and th old natonal currnc); but on th othr hand th xchang rat btwn th coon currnc and th rt o currnc n th world wll b (uuall) lxbl. Th artcularl ortant n th ac o countr-cc or atrc hock (.. tho actng to o o th ontar unon br but not to othr). Howvr a w wll n th ac o coon or trc hock (.. tho quall actng to all th ontar unon br) thr acroconoc ct wll concd wth tho drvd ro a convntonal odl n whch th ontar unon takn a on countr. A ntond abov attt to rovd acroconoc odl or ontar unon ar not coon n th ltratur. A onrng contrbuton Lvn (98) who dvlo a odl or th anal o tablaton olc n a currnc ara but onl th dand-d o th odl condrd. Alo Marton (98) dcu th choc btwn a lxbl xchang rat and an xchang rat unon ollowng vral altrnatv hock n a odl whr (unlk Lvn ) th ul d ncororatd. A rlatd anal that o Läur and Sundararajan (99) who dvlo a thr-countr odl wth a xd xchang rat aong two o th and a lxbl xchang rat toward th thrd countr and tud th ntrnatonal tranon o vral conoc dturbanc (dand-d ontar and thrd-countr hock). A coon atur to all th ar that th condr th ca o a all ontar unon (or two all

3 xd xchang-rat countr n th ca o Läur and Sundararajan).. th ca n whch th rt o th world varabl ar takn a xognou. A vr ntrtng contrbuton to th odllng o ontar unon D Bon (99) who dcu th ctvn o ontar and cal olc n two altrnatv odl dgnd rctvl or a all and a bg ontar unon (.. whn th rt o th world varabl ar ad ndognou). Howvr th ul-d o th odl not ull cd (n artcular rc ntracton btwn th unon br countr ar ottd or lct). In addton nc th anal o ontar and cal olc anl ocud on thr ct on th whol unon cono th crucal dtncton btwn trc and atrc hock nglctd. To uar and dt th growng (and otntall ncrang) ortanc o ontar unon n th ral world th ltratur ccall addrd to th acroconoc odllng o ontar unon rathr carc and ncolt. Th objctv o th ar to dvlo a gnral rawork or th acroconoc odllng o ontar unon trng to ak coatbl both ral and tractablt whch could b uul or olc anal a wll a or tachng uro. Our tartng ont wll b th tandard two-countr Mundll-Flng odl wth rct catal oblt xtndd to ncororat th ul d n a contxt o rgd ral wag [ Mundll (96) and Sach (98). Th bac odl wll b odd o that th on arkt bco coon or th two cono anald whch or a ontar unon and rntd n two vron: or a all and a bg ontar unon. Atr olvng ach odl w wll drv ultlr or ontar ral (.. dandd) ul and xtrnal hock ang a cal attnton to th dtncton btwn trc and atrc hock. Th ar organd a ollow. Th bac rrnc odl dvlod n cton and th anal or a all and a bg ontar unon rntd n cton and rctvl. Th an concluon o th ar ar uard n cton 5.

4 . Th odl.. Dcrton o th odl Th odl n th cton wll b lnar n log wth Grk lttr (all o th takn to b otv nubr) dnotng ultlr and atrk dnotng rt o th world varabl; t ubcrt ar ottd or lct. Prct catal oblt aud and th xchang rat lxbl. Rgardng xctaton w wll ak th lng auton that or an varabl x: E x x- that th xctd valu o a varabl qual that varabl n th rvou rod. Snc w ar n a tatc contxt th auton wll allow u to dnt ral and nonal ntrt rat and dotc and orgn ntrt rat (du to th auton o rct catal oblt; blow). Th dand d o th odl traghtorward and gvn b: α β( ) γ () δ ε () () Equaton () th qulbru condton n th good arkt whr ral outut dnd ngatvl on th ntrt rat and otvl on th ral xchang rat (bng and rctvl th nonal xchang rat - dnd a th dotc currnc rc o a unt o orgn currnc- and th orgn and dotc rc lvl) th rt o th world outut and a ral otv aggrgat dand hock (whch can nclud or ntanc th ct o a hghr ublc ctor dct). Equaton () th qulbru condton n th on arkt whr ral on balanc (bng th nonal on ul) qual th dand or on whch dnd otvl on outut and ngatvl on th ntrt rat. Fnall quaton () th condton or rct catal oblt o that dotc and orgn ntrt rat would b qual to th world ntrt rat coon to all countr. Rgardng aggrgat ul w ollow a Nw Knan aroach [a n. g. Laard Nckll and Jackan (99) or Carln and Sokc (99). Th ul d o th odl nclud a wag quaton a rc quaton and a rlatonh btwn outut and lont: E w w u φrod z () C w φrod z (5) n rod (6) Equaton () how that th nonal wag w ull ndxd to th xctd valu o th conur rc ndx E C and alo dnd ngatvl on th unlont rat u and otvl on roductvt rod and wag rur actor uard n z w. Accordng to quaton (5) rc ar t b addng a argn whch dnd on vral varabl uard n z on avrag cot. And quaton (6) dn lont n a th drnc btwn ral outut and roductvt. A uual th cocnt on th varabl rod ar th a n th wag and rc quaton n ordr to avod that roductvt would act unlont n th long run; Laard Nckll and Jackan (99).

5 On th othr hand a xland abov xctaton on th conur rc ndx wll qual th lvl o th conuton rc ndx C n th rvou rod: E C C (7) whr th ubcrt dnot th valu o a varabl th rod bor. Th ul d o th odl hould b coltd wth th dnton o th conur rc ndx a a wghtd avrag o dotc and orgn rc th lattr valud n dotc currnc: C σ ( σ)( ) (8) and th rat o unlont a th drnc btwn actv oulaton l and lont: u l n (9) Now ro () to (9) w can gt th xron o th aggrgat ul quaton: σ ( σ) ( ) () whr a contractonar ul hock uarng all th obl ul hock condrd abov: w z z l rod Fnall th long-run aggrgat ul quaton would b gvn b: ( σ) ( ) ( ) In th wa our bac odl ad u o quaton () to () and () or ( ) or th hort and th long run rctvl. Th advantag o th ccaton that t wll allow u to tud aratl th dat or act ct o a hock and t nal ct onc rc hav adjutd to th nw qulbru... A acroconoc odl or a ontar unon Now w wll au that th abov odl dcrb a ontar unon.. a grou o countr that hav dcdd abolhng thr natonal currnc and adotng a nw currnc coon to all o th; th xchang rat agant th rt o th world aud to b lxbl. In ordr to ak thng a l a obl w wll au that th ontar unon ad u o two trc countr dnotd b th ubcrt and ; and that ach varabl o th unon a wghtd avrag o th corrondng varabl o countr and wth th wght qual to ½. In othr word or an varabl x: x ( x x ) Thror w wrt th unon quaton n tr o countr and th odl or th ontar unon wll b gvn b : α β ) β( ) γ γ( ) () ( α β( ) β( ) γ γ( ) () A can b rovd al ro th wghtd u o quaton () and () () and (5) and ( ) and (5 ) w can gt rctvl quaton () (onc rlacd ()) () and ( ); n turn quaton () would b a tranoraton o quaton () (onc rlacd ()).

6 δ ( ) ( ) ε () σ ( σ) ( ) ( ) () σ ( σ) ( ) ( ) (5) whl n th long run quaton () and (5) hould b rlacd b: ( σ) σ ( σ) ( ) ( ) ( σ) σ ( σ) ( ) (5 ) w w z z z z bng l rod and l rod. I w tak th rt o th world varabl ( and ) a xognou th odl gvn b quaton () to (5) would rrnt th ca o a all ontar unon.. whn (n analog to th all on cono ca) th unon o all that unabl to act th conoc condton o th rt o th world. In th ca th odl o th ontar unon ha v ndognou varabl: and. Howvr w could altrnatvl au that th unon bg nough to nlunc th conoc condton o th rt o th world. Th would b th ca o a bg ontar unon whr th rt o th world varabl bco ndognou o that th cono o th rt o th world hould b xlctl odlld. Aung an analogou rawork to that o th unon and wrtng th unon varabl n tr o countr and th rt o th world quaton would b: β γ α β( ) ( ) ( ) (6) δ ε (7) σ ( σ) ( σ) ( ) (8) wth quaton (8) rlacd n th long run b: ( σ) ( σ) ( ) ( ) (8 ) bng z z w l rod. In th wa th odl o th bg ontar unon would b gvn b quaton () to (8) and th ght ndognou varabl would b: and... Charactraton o th hock In th ar w ar gong to xan th ct o drnt hock on th ndognou varabl o th odl rntd abov. To that nd w nd to charactr th knd o hock to b anald n th rt o th ar. 5

7 two crtra: () Fro th rctv o th ontar unon hock wll b charactrd ollowng () In whch ctor o th cono th hock occur o that w can dtnguh aong ontar ral (.. aggrgat dand) ul and xtrnal hock whn th hock occur n th on arkt th good arkt th ul d and th orgn ctor o th cono rctvl. hthr th hock act quall to all th countr blongng to th ontar unon.. th ca o a coon or trc hock; or altrnatvl whthr th hock rt occur n a artcular countr and o act drntl to vr br countr o th unon.. th ca o a countr-cc or atrc hock. Accordng to th clacaton ontar and xtrnal hock would b alwa trc; unlk ral and ul hock whch can b thr atrc or trc. Du to our auton o rctl trc countr th ct o a trc hock would b th a both on vr br countr o th unon and on th unon a a whol. A w wll n th nxt two cton th ct o a trc hock n our odl would b quvalnt to th rult drvd ro convntonal odl n whch th ontar unon takn a on countr [.. th Sach (98) odl or th all ontar unon ca and t two-countr countrart or th bg ontar unon ca. In turn th ct o an atrc hock would b th a on an br countr o th unon whr th hock rt occur and alo th a on an br countr o th unon whr th hock latr tranttd; howvr th ct would b drnt or th countr o orgn o th hock whn coard to th countr whr th hock tranttd. Th raon would b that an atrc hock rt occurrng n on o th countr o th unon can b tranttd to th othr thr wth th a gn (whch ot calld th locootv ct ) or wth th oot gn (o that th hock would b bggar-th-nghbour ) dndng on th channl o tranon (th aggrgat dand or th ntrt rat and th ral xchang rat rctvl). On th othr hand th ct o an atrc hock on th unon a a whol would hav th a gn than n th countr whr th hock rt occur and would b qual to on hal o th u o th ct on vr br countr. Notc that th ct on th unon would b gratr n abolut valu than on hal th ct on th countr o orgn o th hock or th locootv ct ca; and lowr n abolut valu th hock bggar-th-nghbour. Strctl akng thr can b atrc ontar hock actng to th dand or on n onl on o th br countr o th unon (rbr that on ul coonl dtrnd n a ontar unon). Howvr t can b hown that th ct o th knd o hock would b th a on both countr and on th unon a a whol and qual to on hal o th ct o a (trc) on ul hock. Th ultat raon would b that th on arkt coon to all th br countr o th unon. In othr word an atrc on dand hock would work n ractc a a trc hock. Rcall that th rult drv ro our auton o rctl trc countr. I th hock wa bggar-th-nghbour th hghr th wght o th countr to whch th hock tranttd th lowr would b th ct o th hock on th unon a a whol; and th wght o that countr wa vr hgh th hock ght b bggar-th-nghbour vn or th whol unon. 6

8 Nxt w wll ntroduc o trnolog. Fro now on an hock d wll b dnotd d whn trc; d d whn atrc orgnatd n countr ; and d d whn atrc orgnatd n countr. On th othr hand w wll alwa condr th ca o otvl gnd hock (th ca o ngatv hock would b analogou) whch wll b dnotd a ollow: Montar hock a (rlctng an ncra n on ul or altrnatvl a dcra n on dand occurrng wthn th ontar unon). Ral hock a or atrc or trc (rlctng a hghr ublc ctor dct or altrnatvl an othr xognou ncra n aggrgat dand occurrng wthn th ontar unon). Sul hock a or atrc or trc (rlctng an xognou ncra n rc or wag a all n actv oulaton or roductvt and n gnral an contractonar hock actng th ul d o th ontar unon). Extrnal hock a or or th all ontar unon ca (rlctng a otv hock to th trad balanc through hghr orgn outut or rc and a ngatv hock to catal ovnt through a hghr world ntrt rat rctvl); or a or or th bg ontar unon ca (rlctng a otv orgn ontar hock a otv orgn ral hock and a ngatv orgn ul hock rctvl analogou to tho rvoul dnd or th ontar unon). In th nxt two cton w wll anal th ct o th drnt hock condrd abov on th ndognou varabl o th two odl dvlod n th cton that tho dcrbng a all and a bg ontar unon rctvl. A n Sargnt (979) w wll gt rducd or or th ndognou varabl a a uncton o th hock and thn drv ultlr.. artal drvatv o th ndognou varabl wth rct to th hock. Notc that nc our odl ar lnar n log th ultlr wll rrnt latct. For lct w wll onl how th gn o th ultlr; thr ull xron can b n n th Andx. A grahcal anal o th odl wll b alo rovdd. 7

9 8. Th odl or a all ontar unon.. Multlr o th hock A hown n cton th odl or a all ontar unon would b gvn b quaton () to (5) wth v ndognou varabl: and. Rcall that n th ca th rt o th world varabl ( and ) would b xognou to th odl. wll rnt rt th hort-run ultlr obtand atr olvng th odl gvn b quaton () to (5) and thn th long-run ultlr obtand ro th oluton o th long-run vron o th odl.. that gvn b quaton () to () ( ) and (5 ). Th ultlr would b or th drnt hock anald: A) Montar hock n th hort run and n th long run. B) Ral hock B. ) Atrc ral hock n th hort run and n th long run. B. ) Strc ral hock n th hort run and n th long run. C) Sul hock C. ) Atrc ul hock

10 9 both n th hort run and n th long run. C. ) Strc ul hock both n th hort run and n th long run. D) Extrnal hock D. ) Forgn outut hock n th hort run and n th long run. D. ) Forgn rc hock both n th hort run and n th long run. D. ) orld ntrt rat hock n th hort run and n th long run... Grahcal anal Nxt w wll rovd a grahcal anal o th ct drvd ro th drnt hock condrd. Our grahcal aaratu wll cont o: () Th YY and LL curv 5 lnkng th outut lvl o countr and ; () Th aggrgat dand uncton o countr and AD and AD to b drvd blow; and () Th hort-run aggrgat ul uncton o countr and AS and AS that quaton () and (5). 5 Th curv wr rt ntroducd b Lvn (98).

11 I w ubtract () ro ().. th qulbru condton n th good arkt o countr ro th analogu or countr w gt th YY curv: β ( ) ( ) γ γ a a otvl gnd rlatonh btwn th outut lvl o countr and. Th would b o nc an ncra (dcra) n countr outut would lad to a wornng (rovnt) n t trad balanc whch would rqur to k th qulbru a drcaton (arcaton) o th xchang rat ladng n turn to an ncra (dcra) n countr outut. Th lo o th curv would b qual to on gvn our auton o tr rgardng both countr conoc rawork. In turn ro ().. th qulbru condton n th on arkt o th unon w gt th LL curv: ε ( ) δ δ δ a a ngatvl gnd rlatonh btwn th outut lvl o countr and. Th would b o nc an ncra (dcra) n countr outut would lad to an ncra (dcra) n t dand or on whch would rqur to k th qulbru a dcra (ncra) n th dand or on o countr and hnc an dcra (ncra) n that countr outut. Th lo o th curv would b agan qual to on now n abolut valu. I w rlac ro LL n YY w gt th aggrgat dand uncton or countr AD : γ βδ γ βδ ε ( ) (9) δ( γ) δ( γ) γ δ δ and n a lar wa rlacng ro LL n YY w gt th aggrgat dand uncton or countr AD : γ βδ γ βδ ε ( ) () δ( γ) δ( γ) γ δ δ Fnall w wll od th YY and LL curv abov b lnatng and. In th wa our odd YY curv ollow atr rlacng ro () and (5): β ( ) ( ) () γ β γ β and n a lar wa our odd LL curv ollow atr rlacng ro () and (5): σ ( σ) ε ( ) ( ) ( ) δ δ δ δ δ Fgur how th grahcal aaratu ud to dcu th ct o hock n our odl. Th odd YY and LL curv [quaton () and () ar rrntd n anl (a) o th gur and th aggrgat dand and aggrgat ul uncton AD and AS or countr [quaton (9) and () and AD and AS or countr [quaton () and (5) aar n anl (b) and (c) rctvl; anl (d) ud to connct anl (a) and ()

12 (c). In th rt o th cton w wll xan th ct o drnt hock to th ontar unon n tr o th grahcal aaratu hown n Fgur. A a gnral rul ont n th gur dnot th ntal qulbru bor th hock; and ont and dnot rctvl th hort-run or trantor qulbru atr th hock occur and th long-run or nal qulbru ollowng th colton o th ull t o ct o th hock (du to th lag n rc adjutnt aud n th ul d). bgn wth th ca o an (alwa trc) xanonar ontar hock n Fgur. Startng ro ont th hock an an aggrgat dand xanon n th hort run both n countr and and th unon a a whol du not onl to th hock n tl but alo to th xchang rat drcaton; th LL AD and AD curv ht to th rght and countr and ta at ont n th gur. Howvr th ncra n rc n both countr togthr wth th xchang rat drcaton lad to a latr ht to th lt o LL (ull ottng th ntal ht to th rght) a wll a o AS and AS (du to th hghr wag araton n both countr). In th nd countr and ov to ont n Fgur and n th long run th ontar hock would b nutral on outut wth a rc ncra qual to th xchang rat drcaton (o that th ral xchang rat would not chang). Th rult would b th a n countr and a wll a n th unon a a whol. Th ca o an atrc xanonar ral hock n countr dctd n Fgur 6. Aggrgat dand xand n countr but contract n countr nc th hock ha ld to an xchang rat arcaton whch dt th otv tranon o th hock through hghr outut n countr would rduc outut n countr ; n turn th xchang rat arcaton and th outut contracton n countr would artall ot th ntal xanon n countr. In tr o th gur th YY and AD curv ht to th rght and AD to th lt o that countr and ov ro ont to ont. Notc howvr that th ct on th unon would b nl nc du to our auton o tr rgardng countr and th dand xanon n countr would ull ot th dand contracton n countr ; n othr word or th unon a a whol th xchang rat arcaton would ull countract th xanonar dand hock that occurrd n countr. Nxt th xchang rat arcaton through t ct on wag ttng would lad to a rghtward ht o LL AS and AS and countr and would ov to ont n Fgur. Th nal rult would b an outut ncra wth an abguou ct on rc n countr could wth an abguou ct on outut and a dcra n rc n countr ; w hav aud n th gur a nal outut contracton n countr. Th ct on countr outut would dnd on th rlatv wght o th ral arcaton agant th rt o th world on th on hand and th outut xanon n countr togthr wth th ral drcaton agant th lattr on th othr hand. A or th unon a a whol outut would ncra (o that th xanon n countr would b gratr than th vntual contracton n countr th hock wa bggar-th-nghbour a n Fgur ) and rc would dcra (.. th rc all n countr would rdonat vn rc go u n countr ). can drv th condton or an atrc ral hock bng bggar-thnghbour n th othr br countr o th unon ro th ultlr n th Andx. 6 Th ca o an atrc xanonar ral hock n countr would b ull analogou wth th rult or countr and now hanng n countr and rctvl.

13 Th condton can b xrd a a thrhold valu or σ a aratr whch would rox th dgr o onn o th br countr o th unon (.. th gratr σ th lowr th dgr o onn) a: γ β σ γ β I th xanonar ral hock would b trc rathr than atrc w would hav th tuaton gvn b Fgur. Snc th aggrgat dand xanon would b xactl balancd b th xchang rat arcaton th hort-run qulbru at ont n th gur wll concd wth th ntal qulbru at ont ; th rghtward ht o th YY AD and AD curv du to th xanonar ral hock would b ull ot b a ltward ht du to th xchang rat arcaton. A bor th arcaton o th xchang rat would ht rghtward LL AS and AS o countr and would nh at ont wth a long-run outut xanon could wth a all n rc both or countr and and th unon a a whol. turn now to th anal o ul hock bgnnng wth th ca o an atrc contractonar ul hock n countr n Fgur 5 7. A outut contract and rc r n countr th tranon o th hock to countr would b abguou du to th uncrtant about th conqunc o th hock on th xchang rat. Th raon that lowr outut and hghr rc n countr would lad to oot ct on th trad balanc and o on th xchang rat. Thror th ct o th hock on countr would b abguou rndrng alo abguou th ubqunt dback ct on countr. So n Fgur 5 th LL YY and AS curv ht to th lt accoand wth an abguou ht o AD ; w hav au or lct no hort-run ct on countr. In an ca dt th abgut rgardng countr th unon a a whol would xrnc th a ct than countr.. lowr outut and hghr rc. In th long run hghr rc would ht ltward LL AS and AS ladng to an addtonal outut all and rc ncra n both countr and th unon a wll a (n th ca) n countr ; n gnral th long-run ct on countr ar alo abguou. A n th ca o ral hock w can drv th condton or an atrc ul hock bng bggar-th-nghbour n th othr br countr o th unon. Exrd agan a a thrhold valu or σ th condton would b: σ ( γ) Th ca o a trc contractonar ul hock hown n Fgur 6. Now outut would all and rc would r unabguoul both n countr and and n th unon n th hort run and n th long run; th ct on th xchang rat would b agan abguou. In tr o th gur th LL AS and AS curv would ht ltward n th hort run (YY would ultanoul xrnc a ltward and a rghtward ht ull ottng ach othr) and th ht would b rnorcd n th long run ollowng th r n rc. To conclud th cton w wll rr brl to xtrnal hock. Th ct o a otv hock to th trad balanc ollowng an ncra n orgn outut would 7 Agan th ca o an atrc contractonar ul hock n countr would b ull analogou wth th rult or countr and now hanng n countr and rctvl.

14 b analogou to th ca o a trc xanonar ral hock hown n Fgur. In turn th ct o a ngatv hock to catal ovnt ollowng an ncra n th world ntrt rat would b analogou to th ca o an xanonar ontar hock hown n Fgur ; th onl drnc would b that now th hort run ct would b quanttatvl allr o that an outut all would occur n th long run both n countr and and th unon. Fnall a otv hock to th trad balanc ollowng an ncra n orgn rc would hav no ct both n th hort run and n th long run onl ladng to an xchang rat arcaton qual n abolut valu to th ntal ncra n orgn rc.

15 . Th odl or a bg ontar unon.. Multlr o th hock Rgardng th odl or a bg ontar unon th would b gvn b quaton () to (8) wth ght ndognou varabl: and. A n th ca o th all ontar unon w wll rnt rt th hort-run ultlr obtand atr olvng th odl gvn b quaton () to (8) and thn th long-run ultlr obtand ro th oluton o th long-run vron o th odl.. that gvn b quaton () to () ( ) (5 ) (6) (7) and (8 ). Th ultlr or th drnt hock would b now: A) Montar hock n th hort run and n th long run. B) Ral hock B. ) Atrc ral hock n th hort run and

16 5 n th long run. B. ) Strc ral hock n th hort run and n th long run. C) Sul hock C. ) Atrc ul hock (long run) (hort run) both n th hort run and n th long run (xct or th ca o ). C. ) Strc ul hock (long run) (hort run) both n th hort run and n th long run (xct or th ca o ). D) Extrnal hock D. ) Forgn ontar hock

17 6 n th hort run and n th long run. D. ) Forgn ral hock n th hort run and n th long run. D. ) Forgn ul hock n th hort run and

18 n th long run... Grahcal anal Th grahcal rrntaton o th odl or th bg ontar unon wll b analogou to th all ontar unon ca. Frt th hort-run aggrgat ul uncton AS and AS quaton () and (5) wll b ud a bor. Rgardng th aggrgat dand uncton AD and AD w wll ak a odcaton n quaton (9) and () abov. I w gt ro th on arkt qulbru condton or th unon and th rt o th world () and (7) and latr rlac ro th good arkt qulbru condton or th unon and th rt o th world () and (6) w gt: ( γ) ( γ) ( ) αδ ε( γ) αδ ε( γ) δ αδ ε ( ( γ) ) δ αδ ε ( γ) ( γ) ( ) αδ ε( γ) Rlacng th xron or n quaton (9) and () w gt th aggrgat dand uncton AD and AD to b ud n th cton: ( γ)(αδ ε( γ)) 6βδ( αδ ε( γ)) ( γ) δ( αδ ε( γ)) ( γ)(αδ ε( γ)) 6βδ( αδ ε( γ)) ε( γ) ( γ) δ( αδ ε( γ)) δ( αδ ε( γ)) ε( γ) ( αδ ε( γ)) ε( γ) ( αδ ε( γ)) ( γ)( αδ ε( γ)) ( γ)( αδ ε( γ)) ε αδ ε( γ) ε( γ) αδ ε( γ) δ( αδ ε( γ)) δ( αδ ε( γ)) and ( γ)(αδ ε( γ)) 6βδ( αδ ε( γ)) ( γ) δ( αδ ε( γ)) ( γ)(αδ ε( γ)) 6βδ( αδ ε( γ)) ε( γ) ( γ) δ( αδ ε( γ)) δ( αδ ε( γ)) ε( γ) ( αδ ε( γ)) ε( γ) ( αδ ε( γ)) ( γ)( αδ ε( γ)) ( γ)( αδ ε( γ)) ε αδ ε( γ) ε( γ) αδ ε( γ) δ( αδ ε( γ)) δ( αδ ε( γ)) (9 ) ( ) 7

19 Th YY curv gvn agan b quaton (). Fnall rlacng ro th hort-run aggrgat ul uncton or th unon and th rt o th world () and (8) n th abov xron or w gt: ( γ) ( γ) ( ) α( δ ) ε( γ) α( δ ) ε( γ) δ δ ( ) α( δ ) ε( γ) α( δ ) ε( γ) ( γ) ( γ) ( ) ( α( δ ) ε( γ) α( δ ) ε( γ) ε ( α( δ ) ε( γ) α( δ ) ε( γ) ε( γ) δ α( δ ) ε( γ) δ α( δ ) ε( γ) α( δ ) ε( γ) ( α( δ ) ε( γ) ε( γ) α( δ ) ε( γ) ( γ) ) α( δ ) ε( γ) whch onc rlacd n quaton () gv u th xron or th LL curv to b ud n th cton: σα( δ ) ( σ) ε( γ) ( ) δ α( δ ) ε( γ) ( σ) α( δ ) ( σ) ε( γ) ( σ) δ α( δ ) ε( γ) δ δ ε ) α( δ ) ε( γ) ) δ ( ) Nxt w can xan th ct o th drnt hock ung our grahcal rrntaton. Bgnnng agan wth th ca o an xanonar ontar hock wthn th unon th ct o th hock on th countr o th unon ar ull analogou to tho occurrng n th all ontar unon hown n Fgur abov. Now th drcaton o th xchang rat o th unon an an arcaton o th orgn xchang rat whch would lad to a dand contracton n th rt o th world wth allng outut and rc. Th n turn would an a lowr hort-run xanon n th unon va lowr xtrnal dand and a lowr ral xchang rat drcaton. In th long run outut would co back to t ntal lvl n th unon wth rc rng b th a aount than th xchang rat drcaton whra n th rt o th world th hort-run dand xanon n th unon would xactl ot th ntal contracton. In othr word a ontar hock wthn th unon would b bggar-th-nghbour n th hort run and would hav no ct on th rt o th world n th long run. Now w turn to th ca o an atrc xanonar ral hock n countr a hown n Fgur 7; agan th ct o an atrc xanonar ral hock n countr would b thr rror ag. Although th rult or countr ar lar to tho or th all ontar unon th xchang rat arcaton an now a drcaton o th orgn xchang rat ladng to a dand xanon n th rt o th world. Th would ncra orgn outut and rc o that va hghr xtrnal dand and a lowr ral xchang rat arcaton th ct on countr outut would b abguou; togthr wth th ncra n countr outut th would an an ncra n th unon outut a wll. In tr o Fgur 7 th YY LL and AD curv ht to th 8

20 rght bng abguou th ht o AD ; n th gur howvr w hav aud a ltward ht (whch l that LL ht l than YY) o that countr outut all and countr and ov ro ont to ont. Fro th ultlr n th Andx w can drv th condton or an atrc ral hock bng bggar-th-nghbour n th othr br countr o th unon a: β σ β In th rt o th world th xchang rat drcaton lad to a contracton n t aggrgat ul o that orgn outut now all lowrng th long-run outut ncra both n countr and n th unon; th ct on countr outut would b tll abguou. In Fgur 7 th LL AS and AS curv ht rghtward and countr and would ov to ont 8. Th ca o a trc xanonar ral hock wthn th unon dctd n Fgur 8. A n th ca o th atrc hock th xchang rat arcaton n th unon an a drcaton o th orgn xchang rat whch lad to a dand xanon n th rt o th world and hnc to a hort-run dand xanon n th unon too. In th gur th LL AD and AD curv ht rghtward countr and ov ro ont to ont and th arcaton o th xchang rat thn ht rghtward LL AS and AS o countr and nh at ont. A bor du to th nal contracton n orgn outut th long-run outut xanon n countr and and n th unon would b lowr than n th all ontar unon; and th ct on rc would b abguou. Thror a w hav n and rgardng thr ct on th rt o th world an (atrc or trc) ral hock wthn th unon would b locootv n th hort run and bggar-th-nghbour n th long run. On th othr hand th ct o ul hock wthn th unon would b analogou to tho anald n th all ontar unon ca. A bor th condton or an atrc ul hock bng bggar-th-nghbour n th othr br countr o th unon would b: β( γ) ( γ)( γ) σ [ β ( γ) ( γ) And rgardng thr ct on th rt o th world th would concd wth tho o ral hock.. th would b locootv n th hort run and bggar-th-nghbour n th long run. conclud th cton b analng xtrnal hock. An xanonar ontar hock n th rt o th world hown n Fgur 9 lad to a orgn dand xanon togthr wth an xchang rat drcaton n th rt o th world.. an arcaton n th unon whch contract dand n th hort run. So th LL AD and 8 Notc that would hav ncrad n th hort run t would ncra n th long run too and th ncra n would hav bn lowr (AS would hav htd b l). Othrw dcra n th hort run th long run ct would b abguou and th ncra n gratr (AS would hav htd b or). 9

21 AD curv ht to th lt n th gur and countr and ov ro ont to ont wth lowr outut and rc. Latr on th hort-run dand xanon n th rt o th world would lad to a dand xanon n th unon ull ottng th rvou contracton at th a t that orgn outut co back to t ntal lvl and rc r b th a aount than th orgn drcaton. In Fgur 9 th LL AD and AD curv co back to thr ntal oton n th gur o that outut and rc n countr and and n th unon would b unchangd n long run. Notc that th ct o th hock would b quvalnt n th long run to tho o an ncra n orgn rc n th all ontar unon ca. Agan a rgard th unon a ontar hock occurrng n th rt o th world would hav bn bggar-th-nghbour n th hort run wth no ct on th unon n th long run. Fgur how th ca o an xanonar ral hock n th rt o th world. Th hock would an a orgn dand xanon could wth an xchang rat arcaton n th rt o th world.. a drcaton n th unon. Dand xand n th unon ladng to hghr outut and rc n th hort run; th LL AD and AD curv ht rghtward and countr and ov ro ont to ont. Nxt th cobnaton o hghr rc n th unon and n th rt o th world and th xchang rat drcaton contract aggrgat ul n th unon and xand t n th rt o th world. Outut all and rc r n th unon and outut r n th rt o th world wth an abguou ct on rc. In Fgur 9 th LL AS and AS curv ht to th lt and countr and nh n ont. Notc that th ct o th hock would b quvalnt to tho o an ncra n th world ntrt rat xand n th ca o a all ontar unon. And rgardng thr ct on th unon a ral hock occurrng n th rt o th world would hav bn locootv n th hort run and bggar-th-nghbour n th long run. Fnall th ct o a contractonar ul hock n th rt o th world would b analogou to tho o an xanonar ral hock n th rt o th world and can b ollowd ro Fgur.

22 5. Concluon In th ar w hav dvlod a gnral rawork or th acroconoc odllng o ontar unon whch could b uul or olc anal a wll a or tachng uro. Th ntrt n odllng ontar unon can b jutd nc th hav bn uggtd a an altrnatv to a t o xd xchang rat (gvn th raglt o th lattr n a world o vr hgh catal oblt) a llutratd b th rcnt ovng to EMU. u a rrnc rawork th tandard two-countr Mundll-Flng odl wth rct catal oblt xtndd to ncororat th ul d n a contxt o rgd ral wag. Th odl odd o that th on arkt bco coon or two trc countr that or a ontar unon and k a lxbl xchang rat agant th rt o th world. Th bac odl rntd n two vron: or a all and a bg ontar unon (.. th rt o th world varabl ar takn a xognou or not) and olvd n two tag: th hort and th long run (.. rc hav adjutd to th nal qulbru or not). Th oluton to th odl ar rntd or th drnt hock anald (ontar ral ul and xtrnal) both algbracall and grahcall. Th rult o th ar ar uard n tabl and or th all and th bg ontar unon rctvl. Rcall that th crucal ont o our rult rr to th ct o atrc hock. Unlk coon or trc hock whch lad n th two countr o th unon to th a ct than n a convntonal odl whr th ontar unon takn a on countr countr-cc or atrc hock lad to drnt ct n th two countr o th unon. In artcular th ct o an atrc hock could b tranttd to th othr countr wth thr th a or th oot gn whn coard to th countr o orgn o th hock dndng on th donant channl o tranon o that hock (th aggrgat dand or th ntrt rat and th ral xchang rat rctvl).

23 Rrnc Carln. and Sokc D. (99): Macroconoc and th wag bargan: A odrn aroach to lont nlaton and th xchang rat Oxord Unvrt Pr Oxord. D Bon V. (99): Stablaton olc n an xchang rat unon. Tranon coordnaton and nlunc on th unon cohon Phca-Vrlag Hdlbrg. Läur N. K. A. and Sundararajan S. (99): Th ntrnatonal tranon o conoc hock n a thr-countr world undr xd xchang rat Journal o Intrnatonal Mon and Fnanc 9-6. Laard R. Nckll S. and Jackan R. (99): Unlont: Macroconoc roranc and th labour arkt Oxord Unvrt Pr Oxord. Lvn J. H. (98): A odl o tablaton olc n a jontl loatng currnc ara n Bhandar J. S. and Putna B. H. (d.): Econoc ntrdndnc and lxbl xchang rat Th MIT Pr Cabrdg MA 9-9. Marton R. C. (98): Exchang rat unon a an altrnatv to lxbl rat: Th ct o ral and ontar dturbanc n Marton R. C. and Blon J. F. O. (d.): Exchang rat thor and ractc Th Unvrt o Chcago Pr Chcago 7-. Mundll R. A. (96): A rl: Catal oblt and z Canadan Journal o Econoc and Poltcal Scnc -. Obtld M. and Rogo K. (995): Th rag o lxbl xchang rat Journal o Econoc Prctv Sach J. (98): ag lxbl xchang rat and acroconoc olc Quartrl Journal o Econoc Sargnt T. J. (979): Macroconoc Thor Acadc Pr Nw York.

24 Andx Sall ontar unon Short run δ γ β γ β ( γ βδ 6β) ( δ)( γ β) σ δ σ δ ( γ βδ) ( δ)( γ β) ( σ) ( σ) δ δ ε δ w δ γ β γ β ( γ βδ) ( δ)( γ β) σ δ σ δ ( γ βδ 6β) ( ρ δ)( γ β) ( σ) ( σ) δ δ ε δ w δ δσ δ ( δ) ( δ)( γ β) ( γ β) δ( γ) ( δ)( γ β) δσ δ ( δ) ( δ)( γ β) ( γ β) ( δ)( γ β) ( σ) δ( σ) δ δ δ ε δ w δ ( δ) ( δ)( γ β) ( δ) ( δ)( γ β) ( γ β) ( δ)( γ β) δσ δ δσ δ ( γ β) δ( γ) ( δ)( γ β) ( σ) δ( σ) δ δ δ ε δ w

25 β β ( δ) β β ( ) ( δ) βδ β ( ) ( δ) σ βδ β ( ) ( δ) βδ β ( ) ( δ) σ βδ β γ β α ( σ)( βδ ) β( δ) ( δ) ε( β) β( δ) w ( σ)( βδ ) β( δ) Long run ( σ)( γ β) β [( σ) β( γ β) [ ( σ) ( γ) 6β [( σ) β( γ β) β γ( σ) ( σ) β α( σ) w ( σ) β ( σ)( γ β) β [( σ) β( γ β) β[ ( σ) ( γ) [( σ) β( γ β) ( σ)( γ β) β [( σ) β( γ β) β[ ( σ) ( γ) [( σ) β( γ β) γ( σ) ( σ) β α( σ) w ( σ) β ( σ)( γ β) β [( σ) β( γ β) [ ( σ) ( γ) 6β [( σ) β( γ β) β δβ δ γδ( σ) ( σ) ( σ)( γ β) [ ( σ) β [( σ) β( γ β) ( γ β) ( γ)( [ σ) β [( σ) β( γ β) β αδ ( σ) ε[ ( σ) β w ( σ) β δβ δ ( σ)( γ β) [ ( σ) β [( σ) β( γ β) ( γ β) ( γ)( [ σ) β [( σ) β( γ β)

26 δβ δ γδ( σ) ( σ) ( σ)( γ β) [ ( σ) β [( σ) β( γ β) ( γ β) ( γ)( [ σ) β [( σ) β( γ β) β αδ ( σ) ε[ ( σ) β ( σ) β w δβ δ ( σ)( γ β) [ ( σ) β [( σ) β( γ β) ( γ β) ( γ)( [ σ) β [( σ) β( γ β) δ( σ) ( σ) β δ( σ) βδ βδ ( σ) β β ( σ) β ( σ) γ [( σ) β ( σ) β α δ [ ( σ) ε[ ( σ) β w ( σ) β Bg ontar unon Short run ε( γ) α( δ) ( δ) [ α( δ) ε( γ) α( δ) ε( β) [ α( δ) ε( γ) ( γ β) α( δ) ε( γ β) [ α( δ) ε( γ) ( γ β) 6βδ [ αδ ε( γ) ε[ ( γ)( γ) α[ ( δ)( γ) 9β[ αδ ε( γ) ( δ) [ α( δ) ε( γ) ( γ β) αβ [ ( γ) ε[ ( γ)( γ) α[ ( δ)( γ) β[ αδ ε( γ) ( δ) [ α( δ) ε( γ) ( γ β) 6βδ αδ ε ε( γ) ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) ε ε ( γ)( σ) ασ( δ) ( δ) [ α( δ) ε( γ) ( γ)( σ) α( σ )( δ) ( δ) [ α( δ) ε( γ) ( γ)( σ) ασ( δ) ( δ) [ α( δ) ε( γ) ε ( σ) ( δ) ε( γ) ( δ) [ α( δ) ε( γ) 5

27 6βδ 6βδ ε( γ) α( δ) ( δ) [ α( δ) ε( γ) α( δ) ε( γ β) [ α( δ) ε( γ) ( γ β) [ αδ ε( γ) ε[ ( γ)( γ) α[ ( δ)( γ) β[ αδ ε( γ) ( δ) [ α( δ) ε( γ) ( γ β) [ αδ ε( γ) ε[ ( γ)( γ) α[ ( δ)( γ) 9β[ αδ ε( γ) ( δ) [ α( δ) ε( γ) ( γ β) ε( γ) ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) ε ε ( γ)( σ) ασ( δ) ( δ) [ α( δ) ε( γ) ( γ)( σ) α( σ )( δ) ( δ) [ α( δ) ε( γ) ε ( γ)( σ) ασ( δ) ( δ) [ α( δ) ε( γ) ( σ) ( δ) ε( γ) ( δ) [ α( δ) ε( γ) α( δ) ε( β) [ α( δ) ε( γ) ( γ β) αβ [ ε( γ) α( δ) ( δ) [ α( δ) ε( γ) [ ε α( δ ) εβ [ α( δ) ε( γ) ( γ β) [ ε α( δ ) εβ εγ [ α( δ) ε( γ) ( γ β) 6βδ ε [ ( γ) δα ε( γ)( γ) β [ ε( γ) δα α( γ) δ( δ) ( δ) [ α( δ) ε( γ) ( γ β) [ δε( γ)( γ) 6βδ ε [ ( γ) δα ε( γ)( γ) α[ ( δ)( γ) β [ ε( γ) δα ( δ) [ α( δ) ε( γ) ( γ β) ε( γ) ( δ) [ α( δ) ε( γ) ε [ ( ) ( ) ε( γ) α δ ε γ ( δ) [ α( δ) ε( λ) [ ( ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) δσ α δ [ ( ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) δ α δ ( σ) [ α( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) δ( σ) ( δ) δ [ ε( γ) α( δ) ( δ) [ α( δ) ε( γ) [ ε α( δ ) εβ εγ [ α( δ) ε( γ) ( γ β) [ ε α( δ ) εβ [ α( δ) ε( γ) ( γ β) 6βδ ε [( γ) δα ε( γ)( γ) α[ ( δ)( γ) β [ ε( γ) δα ( δ) [ α( δ) ε( γ) ( γ β) 6βδ ε [ ( γ) δα ε( γ)( γ) β [ ε( γ) δα α( γ) δ( δ) ( δ) [ α( δ) ε( γ) ( γ β) [ δε( γ)( γ) 6

28 ε( γ) ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) δ α [ ( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( λ) [ ( ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) δσ α δ ( σ) [ α( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) δ( σ) ( δ) δ ε ε ε( γ) ε ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) [ α( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) ε( γ) ( δ) [ α( δ) ε( γ) ε( γ) α( δ) ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) ( γ)( σ) α( σ) ( δ) ( δ) [ α( δ) ε( γ) ( γ)( σ) ασ( δ) ( δ) [ α( δ) ε( γ) ε ( σ) ( δ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ( γ)( σ) α( σ) ( δ) ( δ) [ α( δ) ε( γ) ε( γ) ε ε ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) [ α( δ) ( γ) ε ( γ) ( δ) [ α( δ) ε( γ) ε ( γ) ( δ) [ α( δ) ε( γ) α( δ) ( γ) ε ε ( γ) δ[ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) [ α( δ) ε( γ) [ δ [ α( δ) ε( γ) ( γ) δ( σ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ε ε ( γ) δσ[ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ε ( γ) δ( σ) [ α( ρ δ) ε( γ) ( δ) [ α( δ) ε( γ) δ( σ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) 7

29 β β ( γ) ( δ) β β ( γ βδ) β( δ) ( γ βδ) [ β( δ) β β ( γ) ( δ) β ( γ βδ) β( δ) ( σ β )( γ βδ) ( δ) ( σ β )( γ βδ) ( δ) ( σ β )( γ βδ) ( δ) ( σ) β ( γ βδ) ( δ) w ( γ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( δ) [ α( δ) ε( γ) ( γ) [ α( δ) ε( γ) ( γ) [ ( ) ( ) α δ ε γ Long run ( σ)( γ β) [ β ( σ)( γ) [ β ( σ)( γ) ( γ β) [( σ)( γ) β ( γ 6β) [( σ)( γ) β [ β ( σ)( γ) ( γ β) ( σ) [ β ( σ)( γ) ( σ)( γ) [ ( )( ) β σ γ ( σ)( γ β) [ β ( σ)( γ) [ β ( σ)( γ) ( γ β) [( σ)( γ) β ( γ) [ ( σ)( γ) β [ β ( σ)( γ) ( γ β) ( σ)( γ β) [ β ( σ)( γ) [ β ( σ)( γ) ( γ β) [( σ)( γ) β ( γ) [ ( σ)( γ) β [ β ( σ)( γ) ( γ β) ( σ) [ β ( σ)( γ) ( σ)( γ) [ ( )( ) β σ γ ( σ)( γ β) [ β ( σ)( γ) [ β ( σ)( γ) ( γ β) [( σ)( γ) β ( γ 6β) [( σ)( γ) β [ β ( σ)( γ) ( γ β) 8

30 [ ε[ ( σ)( γ) β δα( σ) ( γ β) ρα[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [ ε[ ( σ)( γ) β δα( σ) ( γ β) ρα[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [( γ) ε[ ( σ)( γ) β αδ[ ( γ)( σ) β ( γ β) ( γ) α[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [( γ) ε[ ( σ)( γ) β αδ[ ( γ)( σ) β ( γ β) ( γ) α[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) ε[ ( σ)( γ) β δα( σ) δα( σ)( γ) ε( γ)( [ σ)( γ) β α[ ( σ)( γ) β α[ ( σ)[ γ β [ ε[ ( σ)( γ) β δα( σ) ( γ β) ρα[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [ ε[ ( σ)( γ) β δα( σ) ( γ β) ρα[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [( γ) ε[ ( σ)( γ) β αδ[ ( γ)( σ) β ( γ β) ( γ) α[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) [( γ) ε[ ( σ)( γ) β αδ[ ( γ)( σ) β ( γ β) ( γ) α[ ( σ)( γ) β α[ ( σ)( γ) β( γ β) ε[ ( σ)( γ) β δα( σ) δα( σ)( γ) ε( γ)( [ σ)( γ) β α[ ( σ)( γ) β α[ ( σ)[ γ β ( σ) [ β ( σ)( γ) ( σ)( γ) [ β ( σ)( γ) ( σ) [ β ( σ)( γ) ( σ) [ β ( σ)( γ) ( σ)( γ) [ β ( σ)( γ) β ( σ)( γ) [ ( )( ) β σ γ ε [( σ)( γ) β αδ( σ) α[ ( σ)( γ) β ( γ) ε[ ( σ)( γ) β αδ( γ)( σ) α[ ( σ)( γ) β ε [( σ)( γ) β αδ( σ) α[ ( σ)( γ) β ( γ) ε[ ( σ)( γ) β αδ( γ)( σ) α[ ( σ)( γ) β 9

31 ε[ ( σ)( γ) β αδ( σ) ( γ) ε[ ( σ)( γ) β αδ[ ( γ)( σ) β α[ ( σ)( γ) β α[ ( σ)( γ) β δ( σ) [( σ)( γ) β [ ( γ) δβ [( σ)( γ) β δ( σ) [( σ)( γ) β δ( σ) [( σ)( γ) β [ ( γ) δβ [( σ)( γ) β [ ( γ) δβ [( )( ) σ γ β ( γ) ( γ) ( γ) w α α α α α α

32 L Y (a) (d) Y L 5 AS AS (b) (c) AD AD Fgur

33 Y (a) L (d) Y L 5 AS AS (b) (c) AD AD Fgur

34 L Y (a) (d) Y L 5 AS (b) AS (c) AD AD Fgur

35 L Y (a) (d) Y L 5 AS AS (b) (c) AD AD Fgur

36 L Y (a) L Y 5 (d) (b) AS AS (c) AD AD Fgur 5

37 L Y (a) (d) Y L 5 AS AS (b) (c) AD AD Fgur 6

38 L Y (a) (d) Y L 5 AS (b) AS (c) AD AD Fgur 7

39 L Y (a) (d) Y L 5 AS AS (b) (c) AD AD Fgur 8

40 L Y (a) (d) Y L 5 (b) AS AS (c) AD AD Fgur 9

41 L Y (a) (d) Y L 5 AS AS (b) (c) AD AD Fgur

42

43 Tabl.A. Sall ontar unon: trc hock (d ) EFFECTS ON OUTPUT PRICES EXCHANGE RATE SHOCKS d d d d d d d MONETARY r lr REAL r lr SUPPLY rlr ± FOREIGN OUTPUT r lr FOREIGN PRICES rlr ORLD INTEREST RATE r w lr Not: () r hort run lr long run () d w Tabl.B. Sall ontar unon: atrc hock (d d j ) EFFECTS ON OUTPUT PRICES EXCH. RATE SHOCKS d d d d d d d d d d d d d d REAL r lr ± ± SUPPLY rlr ± ± ± Not: () r hort run lr long run () d d j j j ( j )

44 Tabl.A. Bg ontar unon: trc hock (d ) EFFECTS ON OUTPUT PRICES EXCHANGE RATE ORLD INT. RATE SHOCKS d d d d d d d d d d MONETARY r lr REAL r lr ± SUPPLY rlr (r) ± (lr) FOREIGN MONETARY r lr FOREIGN REAL r lr ± FOREIGN SUPPLY r ± lr ± Not: () r hort run lr long run () d Tabl.B. Bg ontar unon: atrc hock (d d j ) EFFECTS ON OUTPUT PRICES EXCH. ORLD RATE INT. RATE SHOCKS d d d d d d d d d d d d d d d d d d d d REAL r ± ± lr ± ± ± ± SUPPLY rlr ± (r) (lr) ± ± Not: () r hort run lr long run () d d j j j ( j )