Exchange-Rate Targets and Wage Formation

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.

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