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The role of nontraded goods has received considerable attention from economists attempting to assess the relative merits of fixed versus flexible exchange rate regimes. The traditional view is summarized in McKinnon's [10, 719] statement: "...if we move across the spectrum from closed to open economies, flexible exchange rates become both less effective as a control device for external balance and more damaging to internal price stability. Yet, as is widely recognized, the classification of goods into traded or nontraded depends upon the exchange rate. If an economy is not in long—run equilibrium, its position on the spectrum from closed to open economies will depend, in part, upon current exchange rate policy.

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This paper was published in Southern Economic Journal, Vol. 47, No. 4 (Apr., 1981), pp. 924-940

doi: 10.2307/1058153