DP61 | Theory and Policy of Adjustment in an Open Economy

Author(s)

Publication Date

01/04/1985

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

This paper presents a non-technical introduction to the analysis of how an open economy adjusts to exogenous shocks. Three alternative models of adjustment are considered, each one appropriate to a different time horizon: the specific-factors model with transitional unemployment for the short run; the Heckscher-Ohlin model with temporary capital specificity for the medium run; and a new model of growth and structural change for the long run. Consideration is also given to the choice of policies towards the adjustment process, from both a welfare economic and a political economy perspective.