Abstract
This paper examines the allocation and stabilization consequences of a resource boom in a small open economy. Both the intersectoral allocation of capital and the price of non-traded goods adjust sluggishly; in contrast the nominal exchange rate adjusts instantaneously to ensure that the conditions for uncovered interest parity in the presence of rational exchange rate expectations are always met. The ability of monetary policy to stabilize the economy is examined, and it is shown that, even when intervention is justified in principle, policy errors which arise from confusing real and monetary shocks may worsen macroeconomic performance.
We are grateful to our discussant, John Flemming, to other conference participants, and to Neil Bruce, Willem Buiter, Lars Calmfors and Slobodan Djajic for helpful comments. This research was supported, in part, by the Committee for Social Science Research in Ireland.
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© 1983 The Scandinavian Journal of Economics
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Neary, J.P., Purvis, D.D. (1983). Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation. In: Calmfors, L. (eds) Long-Run Effects of Short-Run Stabilization Policy. Scandinavian Journal of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06349-9_8
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DOI: https://doi.org/10.1007/978-1-349-06349-9_8
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