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Working Paper
Price level versus inflation rate targets in an open economy with overlapping wage contracts
The standard result in models of sticky prices is that an inflation rate target is better than a price level target at minimizing the variance of real output. This paper provides a contradictory result: a price level target may be preferred in an economy that is characterized by flexible prices in one sector and sticky prices in another sector. An example is a highly open economy that has flexible prices in the tradeable goods sector and sticky prices (due to Taylor-type overlapping wage contracts) in the non-tradeable goods sector. The robustness of these results is confirmed for variants ...
Working Paper
Exchange rates, non-traded goods and the terms-of-trade: an empirical application for New Zealand
This article formulates and tests for New Zealand a model of exchange rate determination focusing on non-tradeable goods and terms-of-trade shifts. We emphasize the equilibrium properties of this framework and, in this context, estimate an error correction model where adjustment in response to deviation from equilibrium are an important determinant of short-run exchange rate movements. ; We estimate the model using a new data series on the supply of non-tradeable goods. The model has desirable empirical characteristics, including a plausible error correction equation, strong support for ...