Successful Adjustment in a Multi-Sectoral Economy / Joshua Aizenman.

By:

Aizenman, Joshua

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w2202.Publication details: Cambridge, Mass. National Bureau of Economic Research 1987.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: 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.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w2202 (Browse shelf(Opens below))	Not For Loan

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April 1987.

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.