Journal of Political Economy Vol. 90 No. 1 1982
PPP Exchange-Rate Rules and Macroeconomic Stability
Abstract
Exchange-rate rules that link exchange depreciation to domestic price-level changes are shown to affect the output price-level stability trade-off through two separate channels. On one hand a PPP-oriented exchange-rate policy tends to maintain constant the real exchange rate, thus stabilizing demand. But the exchange-rate policy works also through the supply side, via the prices of imported intermediate goods. Here exchange-rate indexation works to amplify the effect of wage disturbances on prices and potentially on output. In the context of a rational-expectations model with long-term overlapping wage contracts, the analysis shows that the impact of increased indexation on output and price-level stability depends on the extent of monetary accommodation.
- DOI
- 10.1086/261044
- Volume
- 90
- Issue
- 1
- Pages
- 158-165
- Language
- en
- Sources
- crossref openalex