A MODEL OF THE INFLATION CYCLE IN A SMALL OPEN ECONOMY: 1. Introduction

IT is a fairly well-known proposition that a small open economy has very little freedom in its choice of an appropriate point on its long-run 'inflationunemployment' trade-off curve under fixed exchange rates. Indeed, in the extreme case, the equilibrium rate of money wage inflation and the equilibrium rate of unemployment in a small open economy with a trade-off curve are entirely determined by the rate of world price inflation under fixed exchange rates. While this result extends without difficulty to the flexible exchange rate case as long as the rate of appreciation or depreciation...