For a small open economy characterized by intermediate goods trade, exchange rate changes affect not only the relative price of domestic consumption goods to foreign consumption goods, but also the relative price of local input to imported intermediate goods in the trade sector. Therefore, the...

This paper studies the welfare implications of sectoral labor adjustment cost in a two-sector small open economy model with sticky prices. We find that, when the economy faces external shocks, if monetary policy can stabilize the real economy, then sectoral labor market adjustment cost will lead...