Exercise 9.12

Optimal Exchange-rate Policy Under Price Or Wage Stickiness

⬅ Return

Problem

Compare the optimal exchange-rate policies implied by the model with downward nominal wage rigidity developed in Section 9.1 and the model with downward product price rigidity developed in Section 9.15.

1. Show that the families of optimal exchange-rate policies are identical under downward price rigidity and downward wage rigidity provided that: \(\gamma=\gamma_p\), the economy was in full employment in period \(-1\), and that the sources of uncertainty are stochastic disturbances in \(r_t\) and \(y^T_t\).

2. Show that, in particular, it is optimal to fully stabilize the nominal wage or the nominal price of nontradables.

3. Show how these results would change in the presence of productivity shocks in the nontraded sector.

Answer

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