Discussion paper

DP61 Theory and Policy of Adjustment in an Open Economy

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.


Neary, P (1985), ‘DP61 Theory and Policy of Adjustment in an Open Economy‘, CEPR Discussion Paper No. 61. CEPR Press, Paris & London. https://cepr.org/publications/dp61