Aggregate dynamics in an open economy: The case of sluggish output adjustment

Recent experience in Western economies, particularly in the U.S., points to the fact that, though there is a great deal of fluctuation in exchange rates, the trade balance response to changes in exchange rates is rather small, at least in the short-run. An attempt has been made in this paper to construct a model which is consistent with this phenomenon. We introduce a sluggish output supply adjustment in addition to the "usual" sluggish output price adjustment in the commodity market and show that the model displays not only the feature of exchange rate volatility but also the feature of sluggish trade balance adjustment.