Trade uncertainty and the two-step procedure: The choice of numeraire and exact indexation
In a small open economy it is optimal to first maximize national income and second choose the best consumption point. The same two-step procedure under (quantitative) uncertainty is suboptimal if one of the goods is used as numéraire. Optimality is restored however, if nominal prices are deflated by the exact price index. Hence there is equivalence between the appropriate two-step procedure and the introduction of a stock market under uncertainty (Diamond 1967) under ideal circumstances.
|Keywords||international trade policy|
|Persistent URL||dx.doi.org/10.1007/BF01799325, hdl.handle.net/1765/13105|
van Marrewijk, J.G.M.. (1992). Trade uncertainty and the two-step procedure: The choice of numeraire and exact indexation. De Economist, 140(3), 357–372. doi:10.1007/BF01799325