Hysteresis in an Open Economy Model

Author: O'Shaughnessy, Terry¹

Source: Scottish Journal of Political Economy, Volume 47, Number 2, May 2000 , pp. 156-182(27)

Publisher: Blackwell Publishing

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Abstract:

This paper explores the properties of an open economy model in which real exchange rate overshooting has a permanent impact on the rate of unemployment via a hysteresis mechanism. The magnitude of this effect depends on the slope of the short-run Phillips curve, the speed with which expectations adjust in the labour market, and on the speed with which capacity adjusts to changes in capacity utilisation. However, it does not depend on how open the economy is, although the dynamics of the adjustment process (including the extent of the initial jump in the exchange rate following a change in monetary policy) do depend on this factor.

Document Type: Original article

DOI: 10.1111/1467-9485.00158

Affiliations: 1: St Anne's College, Oxford, UK

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