1.1.3. Balance of Payment Motive for Devaluation
Another motive for inflationary policy is a concern about the balance of payment
deficit. The relation between nominal devaluation and the balance of payment position
is given in Cukierman (1992). The nominal devaluation may reduce real wages and, in
the presence of nominal contracts, increases employment and output. Hence, more
resources are available for export or for import substitution and the current account
position improves. The higher output increases domestic consumption and import but,
if the marginal propensity to consume is smaller than one, export grows more than
import. However, the gains from the expansion are the short-term only. While the
contracts are renegotiated, the economy returns to the equilibrium employment and
output. In the rational expectations framework people know that the policymakers are
tempted to reduce their wages. Consequently, private agents set higher nominal wages
Do'stlaringiz bilan baham: |