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Exchange-Rate Targets and Wage Formation∗

Published online by Cambridge University Press:  26 March 2020

Andrew Blake  and
Martin Weale
Andrew Blake
Affiliation:
Department of Applied Economics, Cambridge University
Martin Weale
Affiliation:
Department of Applied Economics, Cambridge University
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Abstract

In the context of economic management, with final targets for money GDP, wealth and the foreign exchange reserves, the exchange rate can be treated as an intermediate target. Monetary policy is used to keep the exchange rate close to its target and the target itself adjusts in response to information about the final targets. The target exchange rate can be used with main emphasis on either money GDP or on wealth. The latter is not possible if the wage—price loop is powerful. Two reruns of history are presented. The first uses the exchange rate mainly to look after money GDP with wages following their historical behaviour. The second uses fiscal policy to look after money GDP and the exchange rate to look after national wealth. It requires a reform of wage bargaining to be successful.

Type
Articles
Information
National Institute Economic Review , Volume 123 , February 1988 , pp. 48 - 64
Copyright
Copyright © 1988 National Institute of Economic and Social Research

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Footnotes

We are grateful to the Centre for Economic Policy Research, the Economic and Social Research Council and the Houblon-Norman Fund at the Bank of England for supporting this research through the award of its fellowship to Martin Weale. James Meade has given much helpful advice. Useful comments have been received from participants in seminars at the Bank of England and at Churchill College, Cambridge and at a CEPR conference in Clare College, Cambridge. We are also most grateful to the National Institute of Economic and Social Research for making Version 7 of their model available to us. The views expressed are not intended to represent those of the Bank of England.

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