Globalization, Stock Market Valuation, and Unemployment: A Dependent Economy Model

The interconnection between asset prices, inflation and unemployment has been central to the recent macroeconomic modelling of economic reforms in emerging market economies. In this paper we examine how effects of economic reforms are critically sensitive to interconnection between variety of real variables and monetary variables in terms of a dependent economy model consisting of a traded sector and a non-traded sector. The model has two necessary ingredients. One is slow adjustment in nominal wage in the sense that wage is rigid in the short run but changes overtime in response to short run unemployment. The second one is adjustment in asset price namely Tobin's q. The paper shows that both trade liberalization and capital account liberalization may generate short run unemployment. Moreover, the paper discusses macroeconomic implications of both fiscal policy and monetary policy.