Regulation, Quality Adjustment, and Relative Price Changes : The Case of Yen Appreciation Shock of 1985

This paper develops a model of small open economy with two sectors-tradable and non-tradable-where the non-tradable sector is subject to a price ceiling and quality adjustment. The model is used for analyzing the effects of exchange rate appreciation on relative prices and employment. The paper shows that, when the economy is initially distorted by a binding price ceiling and suboptimal product quality, an appreciation of the home currency (and the resulting fall of the tradable good price) will induce the non-tradable producers to raise product quality instead of lowering the price at the same pace as the tradable good price. The improved quality will increase the non-tradable demand, and the non-tradable employment level will also increase. The model is applied to the analysis of the yen appreciation shock in 1985-87. Some anecdotal evidences consistent with the model's prediction are also presented.

経済論集

AN00071516

02874237

86

147

161

2006-03-25

英語

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紀要論文

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