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The External Constraint and Short-Run Macroeconomic Policy: Theory with an Application to Argentina, Brazil and Mexico

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  • Paloni, Alberto

Abstract

This paper discusses how the need to achieve external equilibrium constrains short-run macroeconomic policy. A distinction is made between the external balance constraint - which requires the elimination of external deficits - and the financing constraint. Under the former, adjustment can be gradual and any output contraction can be avoided by a combination of expenditure-reducing and expenditure-switching policies. Economic recession may be unavoidable under a financing constraint because adjustment must be immediate. This is shown to be the case both in Argentina and Mexico, and to a lesser extent, in Brazil. The paper shows that the path of stabilization that minimizes adjustment costs is sensitive to the dynamic structure of the particular economy. Copyright 1994 by Scottish Economic Society.

Suggested Citation

  • Paloni, Alberto, 1994. "The External Constraint and Short-Run Macroeconomic Policy: Theory with an Application to Argentina, Brazil and Mexico," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(3), pages 256-277, August.
    • Handle: RePEc:bla:scotjp:v:41:y:1994:i:3:p:256-77
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