chapter  12
37 Pages

Adjustment, Policy, and Monetary Equilibrium in a Two-Country Model 1

WithAlexander K. Swoboda, Rudiger Dornbusch

This chapter aims to integrate and extend two broad classes of comparative-statics propositions that have been developed in the literature. The first class concerns the small, open economy; the other allows for foreign repercussions. Aggregative models focusing on the interdependence of the national incomes of underemployed economies were first developed by Lloyd Metzler in his analysis of the transfer problem and in the foreign-trade multiplier literature. This analysis has mostly been carried out for the case of the single country, a country assumed to be sufficiently 'small' to allow neglect of foreign repercussions. The chapter analyses the nature of general equilibrium in our two-country world and to develop the comparative statics of various policy measures. It also aims to generalise the analysis by allowing for various degrees of capital mobility. Foreign-trade multiplier models do allow for foreign repercussions through the trade balance but neglect monetary considerations.