Agriculture Reference
In-Depth Information
Investment, once allocated to region
j
, is converted to that region's currency
at the rate
E
j
(US$ per unit of local currency). The third, and most cryptic,
set of nternatonal transactons n the orgnal model concerns nternatonal
transport servces. Payments assocated wth
cif/fob
margns are assumed
to be made by the mporter n US dollars. The global transport sector then
demands nputs from each regonal economy and these transactons are
converted at the approprate regonal rates.
Without nominal rigidities the model always exhibits money neutrality,
both at regional and global levels. Firms respond to changes in nominal
product, input and factor prices but a real producer wage is calculated for
labour as the quotient of the nominal wage and the GDP deflator, so that
w=W/P
Y
. Thus, money shocks always maintain constant
w
when nomnal
rigidities are absent — as expected, money is then neutral. To make possible
some rigidity in the setting of the nominal wage,
W
, a parameter,
λЄ(0,1)
is inserted, such that
λ
λ
(2)
=Λ
C
W
P
C
W
P
0
0
where
W
0
is the initial value of the nominal wage,
P
0
C
s the correspondng
initial value of the consumer price index (CPI), and
Λ
s a slack constant.
Whenever
Λ
is exogenous and set at unity, the nominal wage carries this
relatonshp to the CPI and the labour market wll not clear except n the
unlkely event that equaton (2) happens to yeld a market clearng real
wage. The case where the labour market is fully flexible is represented
by settng
Λ
as an endogenous slack varable and thereby renderng (2)
ineffective. At the same time, labour demand is forced to equate with
exogenous labour supply to reflect the clearing market.
The representaton of captal controls
The model assumes that savngs are perfectly moble between regons and
that the allocation of investment between them depends on region-specific
interest premia and, if they are present, capital controls. In the absence of
