Macroeconomic Policy with a Floating Exchange Rate and a Unionised Non-traded Sector

This paper considers the effect of a unionized nontraded sector on welfare and policy in an open economy. In equilibrium, there are endogenous wage and price setting, there may be unemployment, and non-Walrasian policy effects. Nominal wages and prices become pegged to the price of tradables. With direct government employment, the multiplier is unity irrespective of financing. With direct government expenditure on nontradables, the multiplier is less than unity. In both cases, an increase in government expenditure reduces welfare. Copyright 1990 by Royal Economic Society.