Staggered wage setting and exchange rate policy in an economy with capital assets

Abstract

This paper investigates the effects of exchange market intervention on price-output stability tradeoffs in the context of a moderately-sized open economy. In this model, which incorporates interest-bearing capital assets, monetary accommodation is the mechanism whereby exchange rate indexation is achieved. It is seen that increased exchange market intervention reduces output variability but only at the expense of enhanced price and nominal exchange rate variability. This is true of stochastic disturbances on the supply side. For disturbances originating in the money market, increased intervention unambiguously reduces both price and output variability.