ABSTRACT
This chapter discusses the possibility of international labour mobility into a macro model of a small open economy with a flexible exchange rate and a competitive labour market and explores its role in the adjustment of the economy to monetary-policy changes. It presents a labour supply function in the presence of international mobility of labour and the macroeconomic model. The chapter analyzes the long-run response of the economy to an unanticipated expansionary monetary policy and examines the short run effects and the dynamics of adjustment. To consider the role of international labour mobility in the behaviour of the economy between steady states it is convenient to express the variables of the model as deviations from their long-run equilibrium values. The long-run nominal wage rate increases by the same amount as the domestic price level and thus the real wage rate remains unchanged.
