A second best strategy for the recovery of full employment in the open economy

The second best strategy for recovering employment is composed of a policy augmented wage and price freeze, which is preferred by the policy maker because full price flexibility is infeasible in the short run. The efficacy of this strategy is assessed by applying a fixed price, constrained equilibrium model of the open economy in which four unemployment disequilibria are identified. The application of the strategy in two of the four unemployment regions simply transforms the nature of the unemployment problem and raises a further policy dilemma: the policy authority must be able to recognize the switch from one unemployment region to another and revise the policy mix accordingly. The strategy has its best chance of success in regions of Keynesian unemployment, but there is the associated risk of pushing recovery into repressed inflation. Furthermore, the strategy, and in particular commercial policies, promise the most propitious outcome if the exchange rate is fixed.