Successful Adjustment in a Multi-Sectoral Economy
This study analyzes the adjustment to a fiscal reform in a dependent economy. It evaluates the economic factors that are relevant for making the choice between a cut in employment versus a cut in wages as a means of reducing the fiscal wage bill. We demonstrate that in the presence of costly short-run mobility of labor there is a natural advantage to a wage policy over employment policy. Fiscal deficits can be dealt with successfully by a wage policy and with the corresponding adjustment in government demand. These policies may have only marginal consequences on production of traded gds in the short run in the presence of costs of adjustment. Over time the gain in the production of traded goods is determined by the credibility of the fiscal reform. It is shown that the absence of credibility may have major consequences on the adjustment, because it will depress the magnitude of the private investment associated with the fiscal reform.
|Date of creation:||Apr 1987|
|Publication status:||published as From International Economic Journal, Vol. 2, No. 1, pp. 85-99, (Spring 1988).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 122(1), pages 1-47, March.
- R. Dornbusch, 1984.
"External Debt, Budget Deficits and Disequilibrium Exchange Rates,"
347, Massachusetts Institute of Technology (MIT), Department of Economics.
- Rudiger Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.
- Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 98-116.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.