He be g, Ho s ; McCann, Ewen
A icle
Impo ed In e media e Goods, Fo eign P ice Inc eases,
and Domes ic Mone a y Policy: The IS-LM Analysıs Re i ed
Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de
Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: He be g, Ho s ; McCann, Ewen (1982) : Impo ed In e media e Goods, Fo eign
P ice Inc eases, and Domes ic Mone a y Policy: The IS-LM Analysıs Re i ed, Zei sch i ü
Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s-
und Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol.
102, Iss. 3, pp. 237-258,
h ps://doi.o g/10.3790/schm.102.3.237
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/291520
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lmpo ed In e media e Goods,
Fo eign P ice Inc eases,and Domes ic Mone a y Policy:
The IS-LM Analysis Re i ed*
By
Ho s
He be g
and
Ewen
McCann
Un il ecen ly impo s
o
in e media e
goods
ha e
been
neglec ed
in
mone-
a y
(no
in
eal)
ade
heo y
. This
pape
deals
wi h
he
mac oeconomic
con-
sequences o such impo s.
The
basic analy ical ool is a
sui ably
modi ied
Hicksian IS-LM diag am.
I
is shown
ha
ade
in
in e media e
goods does
ha e
some
pa icula
implica ions
ha
do
no
a ise o he wise.
I. In oduc ion
Fo a
nu obe
o
yea s
he
Fleming!Mundell (FM)
modeP
has
been
he
co ne -s one
o
open
economy
mac oeconomics.
2
Thig
model
was
based
on
a
nu obe
o
simpli ying
assump ions
he
main
ones
being:
"To
ocus
a en ion
on
policies
a ec ing
he
le el
o
employmen ,
we
assume
unemployed
esou ces,
cons an
e u ns
o
scale,
and
ixed
money
wages;
his
means
ha
he
supply
o
domes ic
ou pu
is
elas ic
and
i s
p ice le el cons an ."3
Mundell
men ions
h ee
condi ions
o
a
ixed
domes ic
p oduc
p ice,
and
he e
is
s ill
a
ou h
one:
absence
o
impo ed
in e media e
goods
( aw
ma e ials,
semi- inished
p oduc s
e c.).
The
ecen
oil-p ice
c ises,
howe e ,
ha e
eminded
us
ha
he
ou h
condi ion
is
un enable.
In
addi ion,
since
he
wo ldwide
upsu ge
o
in la ion
a es
money
wages
ha e
become
indexed
in
many
coun ies
and
in
o he s
wage
nego ia ions
a e
gea ed
a
p e en ing
a
all
in
eal
wages.
Hence,
he
assump ion
o
a
ixed
money
wage
should
be
abandoned.
4
In
o he
wo ds,
he
FM
*
The
idea o his
pape
eme ged, i s scope
and
con en s
we e
discussed
and
he
necessa y calcula ions comple ed while
He be g
isi ed
he
Depa -
men
o Economics, Uni e si y o Can e bu y, New Zealand,
in
Ap il
1981.
The
i s
d a
was
w i en
du ing
his
s ay
a
he
Depa men
o
Economics,
Facul y o Economics,
Aus alian
Na ional Uni e si y,
in
May/June
1981
.
Fleming
(1962),
Mundell
(1963).
2
C .
Chacoliades
(1978),
chap .
17,
Dombusch
(1980),
chap .
11,
Dombusch
&
Fische
(1978),
chap s.
18, 19,
Sohmen
(1969),
chap .
V,
Takayama
'
(1972),
chap s.
10, 11.
(This Iis is
a
om exhaus i e.)
3
Mundell
(1963),
476;
ou
emphasis.
"'
The wide use o expec a ion-augmen ed Philipps
cu e
indica es
ha
his condi ion is no Ionge gene ally accep ed.
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238
Ho s He be g and Ewen McCann
model
has
o
be
app op ia ely
modi ied
i
i
is
o
emain
a
use ul
analy ical
de ice.
In
ecen
yea s
a
nu obe
o
au ho s
ha e
s udied
he
consequences
o
o eign
p ice
inc eases
and
domes ic economic policy o
an
economy
impo ing
in e media e
ogoods.
The e
a e,
o
example,
pape s
by
B uno
and
Sachs (1979), Findlay
and
Rod iguez (1977), He be g (1976), (1980),
(1981), He be g, Hesse
and
Schuseil (1982), Obs eld (1980)
and
Schmid
(1976),
(1980)5.
These
au ho s
ha e
co e ed
impo an
g ound
and
answe ed
many
ques ions
a
issue.
Ou
main
eason
o
ne e heless
w i ing
ye
ano he
pape
is
o
show
ha
he
Hicksian IS-LM
analysis
can
be
easily
adap ed
o
ake
in o
accoun
in e media e
impo s
and
he
consequen
a iabili y
o domes ic
p oduc
p ices
and
o
p o ide
a
simple
me hod
o
de i ing
qui e
a
nu obe
o conclusions.
This
me hod
is
especially
sui ed
o
handle
di e en
possible condi ions
ela ed,
o
example,
o
he
ype
o
ade
balance
eac ion
o
exchange
a e
changes
o
o
he
deg ee
o
wage
indexa ion.
Since
Hicksian
diag ams
a e
well-known
and
widely
used
in
mac oeconomics
hei
adap ion
we
a e
going
o
p opose
should
help
o
unde s and
mo e
easily
how
in e media e
im-
po s
a ec
he
basic
economic
ela ionships
and
which
implica ions
his
has
o
he
wo king
o
he
sys em.
This
pape
is
o ganized
as
ollows:
In
sec ion
II
we
s a e
ou
assump-
ions
and
de i e
some •basic ela ionships. Sec ion
III
is
de o ed
o
es ab-
lishing
he
p ope ies
o
he
equilib ium
loci
o
he
commodi y
ma ke ,
he
money
ma ke
and
he
balance
o
paymen s,
i.
e.
he
IS, LM
and
BK
cu es.
In
he
inal
sec ion
IV
we
p esen
a
g aphical
analysis
o
he
consequences
o
o eign
p ice
inc eases
unde
ixed
o
lexible
exchange
a es,
o
a
de alua ion
o
he
home
cu ency,
and
o
mone a y
policy
unde
lexible
exchange
a es. (Wi h
ega d
o
iscal policy c . He be g,
Hesse
and
Schuseil (1982).)
II.
Assump ions
and
basic
equa ions
We
shall
s udy
'a
wo-coun y
wo ld
wi h
a
small
domes ic
o
home
economy
and
a
!a ge
o eign economy.
The
domes ic economy
p oduces
a single,
inal
(composi e)
commodi y
ha
can
be
consumed
and
in es ed
a
home
o
expo ed.
The
o eign
economy
p oduces
wo
mo e
(com-
5 An app oach o explain domes ic p ice a iabili y wi hou in oducing
in e media e goods has been ollowed by
A gy
and
Salop
(1979).
They wo k
wi h a p ice index
ha
depends on
he
p ices o domes ic and o eign con-
sump ion goods and wi h a ying deg ees o money illusion on
he
pa
o
labou .
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The
IS-LM Analysis Re i ed 239
posi e) commodi ies, one
o
hem
a
adeable
pu ely
in e media e
good,
he
o he
one a
non- adeable
inal good
ha
is a
non-pe ec
subs i u e
o
he
domes ic
p oduc
.
This is a
minimal
s uc u e
o a model o
s udying
he
consequences
o
in e media e
impo s
. Assuming
ha
he
o eign
adeable
com-
modi y also
se es
inal pu poses does
no
change
he
conclusions
mo e
han
ma ginally
-c . He be g!Hesse/Schuseil
(1982)
. And, as •Sanyal
and
J ones
(1982)
ha e
a :gued, almos
e e y
impo ed
commodi y
has
a
leas
o
be
anspo ed
and
e ailed
be o e
i
can
be
consumed.
Mo eo e ,
aking
he
home
economy o
be
he
sole
p oduce
o
one
o
he
commodi ies is consis en
wi h
casual obse a ions (Swiss wa ches,
Columbian co ee, Swedish s eel)
and
empi ical
e idence -c ., e.g.,
Isa d (1977), Lipsey
and
K a is (1977).
Wi h
ega d
o
he
home
economy we
make
he
ollowing
assump-
ions
(A
1)-
(A
9):
(A
1)
P oduc ion Func ion
(I)
Q = F
(N
,
R)
Q
ou pu
ne
o dep ecia ion, N
labou
inpu ,
R
inpu
o
he
impo ed
in e media e
good (all
in
physical uni s).
F is a neoclassical
p oduc ion
unc ion;
i
is especially
linea
homoge-
neaus
and
s ic ly
quasi-conca e.
The
elas ici y
o
subs i u ion,
a.
be ween
N
and
R is
non-nega i e
and
less
han
uni y.
(A
2) Labou
Supply
and
Wage Fo ma ion
Labou
supply
is comple ely elas ic
a
he
cu en
nominal
wage
a e, W.
This
wage
a e
is
indexed
wi h
espec
o
he
p ice
o
he
domes ic
p oduc ,
P:6
(2) W =
cx
P, 0
::::;
Y. = cons 2: 0
<X
will
be
called
he
deg ee o
wage
indexa ion
. Ob iously,
unde
pe ec
indexa ion
(.x
=
1)
he
eal
wage
a e
W!P is cons an ,
unde
no
indexa ion
(.x
=
0)
he
nominal
wage
a e
is
cons an
,
while
impe ec
indexa ion
(0
<
.x
<
1)
implies
ha
W inc eases
bu
WIP alls as P
goes
up
.7
(A
3)
P ice Fo ma ion
Domes ic
p oduce s
ma k-up
hei
minimum
a iable
cos s:
6 u deno es
he
ela i e
change du/u.
7
In
coun ies
wi hou
o mal
wage
indexa ion
bu
wi h
ade
unians
ying
o
p e en
eal
wages o decline
cx
could
be
in e p e ed
as
he
unions
'
elas ici y o
p ice
expec a ions.
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240
Ho s He be g and Ewen McCann
(3) P =
(1
+
x)
(WN
+
Pn
R)
I
Q,
x = cons
2::
0
Pn
domes ic
cu ency
p ice
o
he
impo ed
inpu
These
h ee
assump ions
de ine
he
domes ic
agg ega e
supply
unc-
ion,
he
impo
unc ion
and
he
eal
income/ou pu
ela ionship.
They
will
be
de i ed
in
u n.
Agg ega e
Supply
Func ion
This
unc ion
desc ibes
he
ela ionship
be ween
he
domes ic
supply
p ice
P,
he
ou pu
le el
Q
and
he
domes ic
p ice
Pn
o
he
in-
e media e
good.
De ine:e
(4)
(5)
AN
: =
WN/(WN
+ Pn
R)
cos sha e o labou
eu
: =
Pn
R/(WN
+
Pn
R)
= 1 -
eN
cos sha e o
he
impo ed
inpu
!?N
: = E (Q,
N)
en
: = E (Q,
R)
ou pu elas ici y wi h espec
o labou
ou pu elas ici y wi h espec
o
he
impo ed inpu
Bo h
(};
a e
posi i e
and
because
o
he
linea
homogenei y
o
F
hey
add
up
o
uni y.
Cos
minimiza ion
equi es
W!Pn=
aFJaN
aFJaR
Hence,
eN
=
(}N,
en
=
(}R·
F om
(2)-
(4)
(6)
Mo eo e , eq. (1)
and
he
de ini ion
o
a,
e.
and
(!R
imply:
Q =
~N
N +
Qn
R =
9N
N +
en
R.
R -N =
(1
(W
-
Pn)
The e o e,
(7)
Finally,
inse ing
(7)
in o
(6)
we
ind:
(8) } > 0 gene ally
17
: = E (P, Pn) = en/(1 -
e eN)
;;;;
1 o
e
$ 1
e E
(u,
)
deno es he (pa ial) elas ici y o u wi h espec o .
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The IS-LM Analysis Re i ed
241
(9)
E(P,
Q) = 0
The
las
wo
equa ions
imply
(i)
ha
o
gi en
Pn
he
domes ic
supply
cu e
is
ho izon al,
(ii)
ha
a, say,
one-pe cen
inc ease
in
Pn
shi s
he
cu e
upwa ds
by
17
pe cen
and
causes
he
domes ic
e ms
o
ade
P/Pn
o
de e io a e
by
1 -
17
pe cen .
Impo
Func ion
Real
impo s,
de ined
as
M = Pn R/P,
a e
de e mined
by
he
ou pu
Ie el
and
he
domes ic
p ice
o
he
in e media e
good: M = M (Pn, Q).
The
pa ial
elas ici ies o
his
unc ion
can
be
de i ed
om
...
-
....
....
...
-
M =
Pn
+ R -P, W =
a:
P
and
eqs.
(7)-
(9):
(10)
(11)
.p,: = E
(M,
Pn) =
(1
-
~X)
(1
-
1J)
~ 0
o a
~ 1
E (M,
Q)
= 1
We
ecall
ha
o
a:
= 1 a change
in
Pn
lea es
Pn/P
and
Pn/W
un-
a ec ed. Since
he e
is
hen
no
inpu
subs i u ion
R
emains
cons an
and
p,
equals
ze o.
Fo
a:
< 1, howe e ,
Pn/P
and
Pn/W
inc ease
as
Pn
goes up.
Subs i u ion
Ieads o a all in R
bu
because
o
a < 1
his
is
p opo ionally
smalle
han
he
ise
in
Pn/P.
Hence,
p,
is posi i e.
Mo eo e , since
he
p oduc ion
unc ion
is
linea
homogeneaus
in
N
and
R
and
since P is
independen
o Q
i
ollows
ha
R
and
M change
by
he
same
pe cen age
as
Q,
i. e. eq. (11) holds.
Reallncome/Ou pu
Rela ionship
I
is
impo an ,
hough
i ial,
o
obse e
_!ha
he
home
economy's
nominal
alue-added,
i.e.
i s
nominal
income, Y, alls
sho
o
he
ou pu
alue,
PQ,
by
he
alue
o
in e media e
impo s,
Pn
R.
De ining
eal
income Y
as
YIP
we
he e o e
ha e:
Y = Q -M =
(1
-
m)
Q wi h m =
MIQ
< 1
Real income is
hus
also a
unc ion
o
ou pu
and
he
domes ic
p ice
o
he
impo ed
inpu :
Y = Y (Pn, Q). Mo e speci ically,
(12)
dY
=
(1
-
m)
dQ -M
,u
Pn
.
(A
4) Domes ic Abso p ion
Domes ic
eal
abso p ion
A depends
on
eal
income
and
on
he
in-
e es
a e
:
9
Ay
deno es he pa ial de i a i e a
A/a
Y,
and
A,
e c. is simila ly de ined.
16
Zei sch i
ü
Wi scha s-
und
Sozialwissenscha en
1982/3
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242
Ho s He be g and Ewen McCann
(13) A = A (Y,
)
, 0 <
Ay
<
1,
A , < 0
(A
5)
Expo s
Real
expo s
X
a e
a
unc ion
o
he
a io
P/P
* o
he
domes ic
supply
p ice
and
he
domes ic
p ice
o
he
o eign
impo -compe ing
commodi y
:
(14) X = X
(P/P
''), -
oo
<
~
= E
(X,
P/P*)
< 0
(A
6)
Money
Demand
and
Supply
Real
money
demand
L
depends
on
ou pu
and
he
in e es
a e:
(15) L = L
(Q,
),
0 < E (L,
Q)
< 1,
L,
< 0
Ou pu
has
been
aken
as a
de e minan
o
eal
money
demand
since
i s
alue
PQ
seems
obe
a
be e
p oxy
o
he
o al
olume
o
ansac-
ions
han
nominal
income
PY
.
Nominal
money
supply
H
has
wo
sou ces: Domes ic
c edi
c ea ion
(Hd)
and
o eign
ese e
ansac ions
by
he
domes ic
cen al
bank
(H )
:
(16) H = Hd + H ,
H
= z
Z
nominal
balance
o
paymen s,
H
ime
de i a i e
o
H
(A
7)
Ne
Capi al
Impo s
Nominal
ne
capi al
impo s
in
e ms
o domes ic
cu ency,
K,
depend
on
he
in e na ional
in e es
di e en ial.
Wi h
he
o eign
in-
e es
a e
gi en
and
exchange
a e
expec a ions
being
s a ic:
(17) K = K
( ),
0
::::;
K'
::::;
oo
(A
8)
Domes
i
c/Fo eign
P ice
Rela ionships
The e
a e
no
a i s,
anspo
cos s
o
o he
ade
impedimen s
:
(18)
e
exchange
a e
(domes ic
cu ency
p ice
o a
o eign
cu ency
uni ),
lln
,
ll*
p ices
o
he
wo
o eign goods
in
e ms
o
o eign
cu ency
.
As
men ioned
ea lie ,
we
a e
especially
in e es ed
in
he
con-
sequences
o
inc eases
in
he
p ice
o
he
in e media e
commodi y.
The e o e,
we
shall
ake
he
p ice
o
he
o he
o eign
good,
ll*,
o
emain
cons an ,
and
wi hou
loss
we
no malize
i
o
uni y
.
Le
us
summa ize.
The
home
economy is
desc ibed
by
he
ollowing 5
equa ions:
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supply unc ion:
(19)
The 15-LM Analysis Re i ed
P =
P(elln>
eal income/ou pu ela ionship:
(20) Y =
Q-
M
(e
IIn.
Q)
commodi y
ma ke
equilib ium:
(21) Q = A
(Y,
)
+ X
(P/e)
money
ma ke
equilib ium:
(22)
PL
(Q,
)
=
H,
H = Hd +
H ,
H
= Z
balance
o
paymen s:
(23) Z = P
[X
(P/e)
--
M (e IIR,
Q)]
+ K ( )
111.
P ope ies
o
he
IS, LM
and
BK
cu es
243
The
g aphical
analysis
will
be
based
on
a
sui able
adap ion
o
he
Hicksian
diag am
in
(Y,
)-space. Ob iously,
we
could
also
use
simila
diag ams
in
(Q,
)-space
o
like
A gy
and
Salop (1979)
in
(Y,
P)-space
bu
hen
he
implica ions
o
ou
model
would
no
s and
ou
as
clea ly
agains
hose
o
he
FM
model.
Th ee
equilib ium
loci
a e
o
impo ance.
They
a e
de ined
now
as
ollows:
IS
cu e:
commodi y
ma ke
equilib ium
(eq. (21)),
LM
cu e:
money
ma ke
equilib ium
(eq. (22)),
BK
cu e:
balance-o -paymen s
equilib ium
(eq. (23)
wi h
Z = 0),
each
subjec
o
he
agg ega e
supply
unc ion
(eq.
(19))
and
he
eal
income/ou pu
ela ionship
(eq. (20)).
To
es ablish
he
p ope ies
o
hese
loci
we
i s
o m
he
o al
di -
e en ials
o
he
las
5
equa ions:
0 0
1
-(1-m)
-Ay
1
0
LQ
0 m
(24)
0 0
17
0 0 -
Mp,
A, 0 0
-
L,
1 0
K'!P
0 -
Mp,
16°
1
0
-x;
L
-X;-X+M
17
-M~A-
-x;
0
-x;-Mp,
d
dH
lln
e
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244
Ho s
He be g
and
Ewen
McCann
1.
IS
Cu e
Sol ing
he
i s
h ee
equa ions
o
(24)
o
dY
yields:
(25)
[1-
(1-m)
Ay]
dY
=(1-m)
A
d
+
[(1-m)
17
x
~-
M
!~l
Jjn
+ e
wi h
(26) T : = -
(1
-
m)
(1
-
1])
X~
-M
=
--
(1
-
1J)
[(1 -
m)
X~
+
(1
-a)
M]
The
coe icien
o
dY
is posi i e
and
hose
o
d
and
IlR
a e
nega i e
while
may
be
o
ei he
sign.
The e o e,
(27a)
8Y/8
<o:
nega i e
slope
(27b)
8Y/8
lln
<o:
le wa d
shi
i
d
ll
R > 0
i
T>O:
igh wa d
shi
)
l de>O
(27c) 8 Y/8 e = 0
i
=O,
especially
("(
= 1:
no
shi
<o
i
<o:
le wa d
shi
Clea ly,
T
should
be
ela ed
o
he
Ma shall-Le ne
(ML) condi ion,
and
i
is
easy
o
see
ha
his
is
indeed
he
case.
F om
(8)-
(11),
(28)
dX
=
X;
(P
-
&)
==
-
(1
-
1J)
X~
,
dM
=
MQ
+ M
1-'
e
As
he
ML
condi ion
usually
equi es
eal
income
o
be
s ill
un-
changed
we
impose
his
es ic ion
he e
as
weil.
(12)
implies
ha
hen
Q = m
-1-
e/(1
-m),
and
inse ing
his
equa ion
in o
(28) yields:
(29)
dX-
dM
J =
e/(1-
m>
Y =
cons
Hence,
he
LM
condi ion
is
sa is ied
i
> 0
and
is
s ic ly
iola ed
i
<o.
I
is
impo an
o
no e
ha
is
ela ed
o
he
change
in
he
eal
ade
balance
ollowing
an
exchange
a e
change
wi h
he
p ice
o
he
domes ic
p oduc
adjus ing.
The e o e,
mus
be
ze o
i
wages
a e
pe ec ly
indexed
since
hen
a
a ia ion
in
e
lea es
eal
expo s
and
eal
impo s
una ec ed.
This
is
indeed
bo ne
ou
by
he
RHS o
he
de ini ion
O
T
( emembe
ha
IX
= 1
implies
'YJ
=
1).
In
he
FM
model
he
ML
condi ion
is
necessa y
and
su icien
o
s abili y.
This
is
no
Ionge
ue
o
he
p esen
model,
and
hence
we
may,
and
will,
s udy
he
consequences o <
0.
The
las
obse a ion
is o some
impo ance
o
a
leas
wo
easons:
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IS
/
The
15-LM
Analysis
Re i ed
/
LM'
/
/
LM"
/
4._--"?,c...._/
--/
/_:_---w./
LM
BK
~~~---------------------------------------------.Y
Fig
. 4
251
he
home
cu ency
and
some educ ion
in
he
inc ease o
PR
and
P
and
he
dec ease o
HIP.
Allowing o
he
now
mos
a ou able
ci cum-
s ances, iz. < 0
and
B <
0,
no
only
he
LM
cu e
bu
also
he
IS
and
BK
cu es mo e back o
he
igh
o
posi ions LM", IS"
and
BK".
The
new
equilib ium
a
poin
V is associa ed
wi h
a
highe
domes ic
p oduc p ice
and
lowe
le els o eal income
and
ou pu
bu
hese
changes
a e
smalle
han
unde
ixed exchange
a es
in
he
sho
un
as weil as
in
he
quasi-lang
un.
To p o e
ha
he
las
conclusion is
gene ally
alid
we
ha e
o show
ha
all
h ee
cu es
mus
inally lie o
he
le
o
hei
ini ial
posi ions.
Suppose o
he
momen
he
exchange
a e
had
allen
o
such
an
ex en
ha
-e =
iiR
and
hence
PR
= p =
0.
Then
he
new
equilib ium
seems
obe
associa ed
wi h
he
old le els o
Y,
Q,
e c. Howe e ,
he
ela i e p ice Pie o
he
domes ic p oduc ,
ele an
o o eigne s,
has
L"isen,
so
ha
eal
expo s
ha e
declined. Since
his
would
imply
a
paymen s
de ici
he
exchange
a e
can
in
ac
no
all as much as
jus
assumed. To
pu
i
di e en ly, -e >
llR,
PR>
0
and
P > 0
mus
al-
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252 Ho s He be g and Ewen McCann
ways
hold. Consequen ly, IS", LM"
and
BK"
a e
indeed
posi ioned
o
he
le
o IS,
LM
and
BK, espec i ely.
Clea ly,
> 0
and
B > 0 ce e is pa ibus
now
imply
a
mo e
p o-
nounced
all
in
Y
and
Q
han
in
he
p e ious
case
when
he e
was
a
de alua ion.
Thus
we
ha e
a second
esul :
Suppose again domes ic commodi y
supply
is comple ely elas ic. Exchange a es lexibili y
hen
does
no
p e en
a ise
o
he
o eign p ice
o
he
impo ed
inpu
o cause
in la ion-cum- ecession
a
home.
In
ac , as
he
ex e nal alue
o
he
domes ic cu ency
need
no
inc ease
bu
may
decline hese ad e se
e ec s can
e en
be s onge han
unde
pegged exchange a es.
Mos o
ou
a gumen s
did
no
depend
an
he
deg ee
o
wage
in-
dexa ion.
The
only
excep ion
is
ha
some o
he
seconda y
changes
in
case
o
a
de alua ion
canno
occu
i
<X
= 1 since
hen
= 0.
Bu
ha
is
o
mino
consequence.
The e o e,
he
wo
esul s
epo ed
abo e
a e
alid
o
0 <
<X
< 1.
I
should
be
aken
in o
accoun
ha
in
eali y
coun ies
impo
a
whole
a ay
o
in e media e
goods.
I
he
o eign
p ice
o
one
o
hem,
e en
i
i
is
an
impo an
aw
ma e ial
like
c ude
oil, goes
up
i
will
aise
domes ic
p oduc
p ices
only
by
a
smalle
pe cen age
al hough
wages
may
be
ully
indexed
.
The
eason
is
ha
some
inpu
cos s
emain
he
same.
As
a
simila
" e a da ion
e ec "
ollows
om
less- han- ull
wage
indexa ion,
we
should
in
he
p esen
case
ake
<X
o
be
less
han
uni y.
A
he
same
ime
i
is
emp ing
o look
in o
he
ques ion
how
he
ex en
o
which
cu es
shi
and
he e o e
equilib ia
change
a ies
wi h
he
deg ee
o
indexa ion.
This
would
equi e
o
s udy
he
ela ionships
c
he
a ious
coe icien s
in
eqs. (26),
(30)
and
(32)
an
he
one
hand
and
a
an
he
o he
hand
. A quick inspec ion,
howe e ,
e eals
ha
one
can-
no
hope
o
sweeping,
clea -cu
indings.
So
a
we
ha e
no
discussed changes
in
employmen .
l
will
be
e-
called
ha ,
unlike
he
FM assump ions,
ou
assump ions
da
no
imply
ha
ou pu
and
employmen ,
Je alone
eal
income
and
employmen ,
always
change
in
he
same
di ec ion.
The
eason, o cou se, is
he
p esence
o
subs i u ion
e ec s
in
p oduc ion.
Bu
hese
e ec s
a e
small
i
o is close o
ze o
so
ha
he
wo
inpu s
a e
poo
subs i u es
o
i
<X
is close o
uni y
so
ha
he
inpu -p ice
a io
does
no
change
much,
and
hey
a e
nil
o
o = 0
o
<X
= 1.
Ou
hi d
esul
is: Highe cos s
o
he
impo ed
inpu
educe
employ-
men
unde
bo h exchange a e egimes
i
he
elas ici y
o
inpu
sub-
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The
IS-LM
Analysis Re i ed
253
s i u ion
is
nil
o
small
o
i
wages
a e
(nea ly)
pe ec ly
indexed
.
O he wise
employmen
may
inc ease
al hough
ou pu
and
eal
income
decline.
Tha
highe
p ices
o
impo ed
inpu s
will
ha e
a
s ag la iona y
impac
an
he
domes ic economy
has
o me ly
been
shown
by
B uno
and
Sachs (1979),
Findlay
and
Rod iguez
(1977),
He be g
(1980), (1981)
and
Schmid
(1980).
He be g
and
Schmid
also
obse ed
ha
exchange
a e
lexibili y
may
wo sen
he
si ua ion,
and
He be g
has
s udied
he
implica ions o
he
deg ee
o
wage
indexa ion.
2. De alua ion
o
• he
Home Cu ency
lmplici ly,
he
consequences
o
a
de alua ion
o
he
ha ne
cu ency
ha e
al eady
been
deal
wi h
in
he
p e ious
subsec ion. As
we
ha e
seen,
an
inc ease
o
he
exchange
a e
need
no , as
in
he
FM
wo ld,
aise
eal
income
and
ou pu ,
and
ha
o
wo
easons:
(i)
The
ade
balance
may
de e io a e
(F
<
0).
(ii)
The
compe i i eness
o
domes ic
p oduce s
need
no
imp o e
(cx
= 1)
11
•
Figu e
2
can
be
ein e p e ed
o co e
he
i s
o
hese
possibili ies.
The
ansi ion
om
IS, LM,
BK
o
IS',
LM',
BK'
is
now
due
o
he
de alua ion.
The
new
sho - un
equilib ium
a
U is associa ed
wi h
lowe
eal
income
and
ou pu
and
wi h
a
highe
domes ic
p oduc
p ice.
As discussed
in
no e
10, s aibili y
equi es
ha
he
balance
o
paymen s
has
u ned
in o
su plus,
i.e.
ha
U lies
o
he
le
o
BK'
.
Hence,
nominal
money
supply
inc eases
and
pa ly,
bu
no
comple ely,
e-
e ses
he
decline
in
Y
and
Q.
Only
i
in
ime
o eign
impo
demand
becomes
su icien ly
elas ic
o
ende
he
LM
condi ion
sa is ied
he
de alua ion
will
inally
esul
in
an
expansion.
Conside
he
second case
and,
o
highligh
he
implica ions
o
pe -
ec
wage
indexa ion,
suppose
ha
ade
was
ini ially
balanced
.
Fig-
u e
5 applies.
An
inc ease
o
he
exchange
a e
shi s
he
LM
cu e
o
he
le
o
posi ion LM'.
Since
= 0
he
IS
cu e
emains
una ec ed.
Mo eo e ,
since
poin s
an
he
BK
cu e
o
he
uppe
igh
(lowe
le )
o T
a e
associa ed
wi h
a
ade
de ici (su plus),
his
cu e
o a es
coun e -clockwise
a aund
T.
The
sho - un
e ec
o a
de alua ion
is
again
a all
in
eal
income
and
ou pu
(c .
poin
U).
The
balance-o -
paymen s
induced
inc ease
in
nominal
money
supply,
howe e
,
shi s
he
LM
cu e
back
un il
i
once
mo e
passes
h ough
T. Hence, a
de al-
11
In
he
p esen
case
"'
= I is
no
subjec
o
he
same
objec ions
as
dis-
cussed
abo e
wi h
ega d
o
changes
in
Il
R
since
a
de alua ion
a ec s
he
domes ic
p ices
o
all
impo ed
in e media e
goods.
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254 Ho s He be g and Ewen McCann
T
I
~~~-------------------------------------------.Y
Fig. 5
ua ion
has
no
pe manen
eal
e ec s;
i
only
aises
he
domes ic
p o-
duc
p ice
by
he
same
pe cen age
by
which
he
exchange
a e
has
gone
up
.
Thus
we
ha e
a
ou h
esul
:
Unde
pe ec
wage
indexa ion
a
de al-
ua ion
o
he
home
cu ency
has
an
ad e se
ansi o y,
bu
no
pe -
manen
impac
on
eal
income,
ou pu
and
employmen .
I ,
howe e ,
he
ML
condi ion
is
s ic ly
iola ed,
he
same
policy
is
ecessiona y
in
he
sho
un
as
well
as
in
he
quasi-long
un.
Finally
we
obse e
ha
e en
i
a
de alua ion
does
wo k
as
expec ed
i s
expansiona y
e ec is
he
weake
he
la ge
cx.
This
is
due
o
he
ac
ha
a
highe
deg ee
o
wage
indexa ion
means, ce e is
pa ibus,
mo e
p onounced
domes ic
p ice
inc eases which
e ode
pa
o
he
possible
imp o emen
o
he
home
p oduce s'
compe i i eness.
3.
Mone a y Policy
The
consequences
o
mone a y
policy
ha e
also implici ly
been
de i ed
in
subsec ion IV 1.
We
ha e
seen
he e
ha
unde
ixed
ex-
change
a es
i s e ec s
a e
quali a i ely
he
same
as
in
he
FM model.
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The
IS-LM
Analysis
Re i ed
255
Fig.6
Unde
lexible
a es,
howe e ,
hey
can
be
d as ically
di e en ,
and
his
is, o cou se,
due
o
he
conco ni an
exchange
a e
changes.
To
suppo
he
s a emen
le
us
look
in o
he
same
wo
special cases
as
abo e:
The
basic
ea u e
is
ha
a
highe
nominal
money
supply
causes
a
de alua ion
o
he
home
cu ency.
Figu es 6 and 7
shown
he
com-
bined
implica ions
o
hese
changes
o
< 0
o
o
IX
=
1,
B =
0,
espec i ely.
' lhis
es ablishes
a
i h
'
and
inal
esul :
Le
exchange a es be lexi-
ble. Unde
pe ec
wage
indexa ion
and
wi h
ade
ini ially
balanced
an inc ease
in
nominal
money
supply
aises
he
domes ic p oduc p ice
by
he
same pe cen age
and
lea es eal income,
ou pu
and
employmen
comple ely una ec ed. I ,
on
he
o he hand,
he
ML
condi ion
is
s ic ly iola ed
he
same policy leads o an
e en
highe
p ice
inc ease
and
o a decline
in
eal income e c. These ou comes a e
independen
o
he
deg ee
o
in e na ional capi al mobili y.
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256 Ho s He be g and Ewen McCann
LM
/ /
I
/
I
y
Fig.7
Ob iously
,
hese
indings
a e
alien
o a FM
wo ld,
and
hey
shed
some
new
ligh
on
he
old
ques ion
o
he
e icacy
o
mone a y
policy12•
The
secend
one
has
also
been
epo ed,
al hough
based
on
qui e
di -
e en
easoning,
by
Niehans (1975).
And
he
i s
one
is a
a he
com-
mon
conclusion,
a
leas
wi h
ega d
o
he
"lang
un",
o
he
mone a y
app oach
o
he
balance
o
paymen s
(c ., e.g., Do nbusch (1980),
chap
.
11/11)
and
e e ences
gi en
he e)
.
Bu
i
will
be
no ed
ha
i
has
been
de i ed
he e
wi hou
elying
on
he
concep
o
a
ull
employ-
men
le el
o
income
o
a
na u al
a e
o
unemploymen
om
which
he
ha ne
economy
can
a
mos
empo a ily
de ia e.
Ins ead
i
ollows
om
he
ac
ha ,
al hough
nominal
money
supply
and
absolu e
p ices
ise,
eal
money
supply
and
ela i e
p ices
emain
unchanged
.
!
He be g, Hesse and Schuseil (1982) ha e shown
ha
on
he
o he band
unde lexible exchange a es and pe ec wage indexa ion iscal policy ends
o be
he
mo e e ec i e
he
highe
he
deg ee o in e na ional capi al
mobili y.
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The
IS-LM Analysis Re i ed
257
4.
Some Ex ensions
Close
inspec ion
e eals
ha
he
undamen al
condi ion
o
he
las
wo
indings
is
an
in e se
ela ionship
be ween
he
exchange
a e
and
eal
money
supply.
Such
a
ela ionship
would
also
exis
in
he
absence
o
impo ed
in e media e
goods,
bu
wi h
he
domes ic
p ice
le el
in-
co po a ing
o eign
consump ion
goods
and
wi h
wage
indexa ion
.
Con-
sequen ly,
simila
esul s
apply.
Mo eo e ,
we
wish
o
epo
ha
all
ou
indings
ca y
o e
o
he
case
o
declining
labou
p oduc i i y
and
hence
an
upwa d
sloping
domes ic
supply
cu e
since
he
IS,
LM
and
BK
cu es
e ain
hei
basic
p ope ies.
(Fo
a
de ailed
p oo
in e es ed
eade s
should
con ac
he
au ho s.)
Summa y
Allowing o
impo s
o
in e media e
goods
and
o
wage
indexa ion
o
a ious deg ees
he
pape
deals
wi h
he
mac oeconomic consequences o
o eign
p ice
inc eases, a de alua ion o
he
home
cu ency
o
an
expansiona y
domes ic
mone a y
policy o a
small
open
economy.
Based
on
sui ably modi ied Hicksian
IS-LM
diag ams
he
analysis yields a
nu obe
o
clea -cu
esul s
ha
pa ly
di e om
he
implica ions o
he
Fleming-
Mundell model. E. g.,
highe
p ices o
impo ed
inpu s
can
be
expec ed
o
cause in la ion-cum- ecession
a
home
and
he
same
migh
e en
be
ue
o
an
inc ease o domes ic money supply.
Zusammen assung
In
diese
A bei
we den
ü
eine kleine o ene Volkswi scha ,
die
Zwi-
schenp oduk e
impo ie
und
in
de
de
Nominallohnsa z
ollkommen
ode
eilweise
indexie
is , die mak oökonomischen
Auswi kungen
auslän-
dische P eiss eige ungen,
eine
Abwe ung
de
heimischen
Wäh ung
ode
eine
expansi en
inländischen Geldpoli ik
un e such
.
G undlage
de
Ana-
lyse
is
ein
geeigne modi izie es Hicks'sches IS-LM-Diag amm. Es
wi d
eine Reihe
kla e
E gebnisse abgelei e , die z. T.
on
den
Implika ionen
des
Fleming-Mundell-Modells abweichen. Beispielsweise
we den
s eigende
Ko-
s en
ü
impo ie e
Inpu s
in
de
Regel zu
In la ion
und
Rezension
üh en,
und
gleiches
kann
soga
die Folge
eine
Auswei ung
de
inländischen
Geld-
menge sein.
He e ences
A gy,
V.
and
J.
Salop
(1979),
P ice
and
ou pu
e ec s
o
mone a y
and
iscal
policy
unde
lexible exchange a es. IMF
S a
Pape s
26
(1979),
224-
256.
B uno
, M.
and
J.
Sachs (1979), Mac oeconomic
adjus men
wi h
impo
p ice
shocks: Real
and
mone a y
aspec s,
Ins i u e
o
In e na ional
Economic
S udies, Discussion
Pape
118. S ockholm.
1'1
Zel sch i
li
Wi scha s-
und
Sozialwissenscha en
1982
/3
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/schm.102.3.237 | Gene a ed on 2023-04-04 12:01:15
258
Ho s
He be g
and
Ewen
McCann
Chacoliades, M. (1978),
In e na ional
mone a y
heo y
and
policy
.
New
Yo k.
Do nbusch,
R. (1980),
Open
economy
mac oeconomics.
New
Yo k
.
-
and
S.
Fische
(1978),
Mac oeconomics.
New
Yo k
.
Findlay,
R.
and
C.
A.
Rod iguez
(1977),
In e media e
impo s
and
mac oeco-
nomic
policy
unde
lexible
exchange
a es
.
Canadian
Jou nal
o
Eco-
nomics
10
(1977),
208-217.
Fleming
, J. M. (1962),
Domes ic
inancial
policies
unde
ixed
and
lexible
exchange
a es.
IMF
S a
Pape s
9 (1962),
369-
380;
ep in ed
in:
J . M.
Fleming,
Essays
in
in e na ional
economics.
London
(1979).
He be g,
H. (1976),
On
impo ed
in la ion.
Zei sch i
ü
die
gesam e
S aa s-
wissenscha
132 (1976),
609-
632.
-(1980),
lmpo ed
i
n e media e
goods,
o eign
p ice
inc eases,
and
domes ic
economic
policy.
Ins i u
ü
Theo e ische
Volkswi scha sleh e,
Uni e -
si ä
Kiel
(mimeo
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-(1981),
Impo ie e
Zwischenp oduk e
und
mone ä e
Außenhandels heo ie,
in
: G.
Bombach,
B.
Gahlen
,
A.
E.
O
(eds.),
Zu
Theo ie
und
Poli ik
in e na ionale
Wi scha sbeziehungen
.
Tübingen
, 215 -264.
-,
H. Hesse
and
A. Schuseil (1982),
Impo s
o
in e media e
goods
and
he
e icacy
o
iscal
policy
unde
lexible
exchange
a es
.
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A chi
118 (1982), 104 -130.
Isa d
, P. (1977),
How
a
can
we
push
he
"law
o
one
p ice".
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Eco-
nomic
Re iew
67
(1977), 942 -948.
K a is,
I.
B.
and
R. E.
Lipsey
(1977),
Expo
p ices
and
he
ansmission
o
in la ion
.
Ame ican
Econom
ic
Re iew
67 (1977), 155 -163.
Mundell
, R.
A.
(1963),
Capi al
mobili y
and
s abiliza ion
policy
unde
ixed
and
lexible
exchange
a es
.
Canadian
Jou nal
o
Economics
and
Poli ical
Science
29 (1963),
475-485,
ep in ed
in
: R.
A.
Mundell,
In e na ional
Eco-
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(1968).
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J.
(1975),
Some
doub s
abou
he
e iciacy
o
mone a y
policy
unde
lexible
exchange
a es.
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o
In e na ional
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5 (1975),
275-281.
Obs eld,
M. (1980),
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impo s,
he
e ms
o
ade,
and
he
dynamics
o
he
exchange
a e
and
cu en
accoun .
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o
In e -
na ional
Economics
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(1980), 461 -480.
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K.
K.
and
R. W. Jones (1982),
The
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M. (1976), A
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361.
-(1980),
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,
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und
Beschä igung,
in:
H.
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(ed.),
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ü
Socialpoli ik
N.
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, E. (1969),
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A.
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