TRADED GOODS, COMPETITIVENESS AND AGGREGATE FLUCTUATIONS IN THE UNITED-KINGDOM

The model that is put forward treats the traded goods sector as fundamentally competitive, and the non-traded goods sector as oligopolistic. The focus is on the determination of the relative price of traded to non-traded goods, the equivalent of international competitiveness in these models, and its role in aggregate fluctuations. The model is "real', and refers to the short run. The econometric estimates suggest that at a general level the model is quite successful in accounting for the UK business cycle. At a "deeper' level, however, the main problem is the implausibly low estimate of the share of tradeables in GDP. The model suggests that government expenditure can be used to affect unemployment systematically, but this is at the expense of fluctuations in competitiveness, defined as the relative price of traded to non-traded goods. Real wages adjust quite sluggishly towards their equilibrium values, and the price of domestic tradeables adjusts sluggishly to changes in the price of foreign tradeables and the equilibrium terms of trade. This pattern entails interesting adjustment patterns which are explored in the main body of the paper. -from Author