Expenditure Switching Effect Research Articles

Policy Coordination with Sticky Labour Markets: A European Study

This paper examines the macroeconomic consequences of rigidities in the European labour markets, and shows that attempts to impose a single regime on economies with structural differences can lead to a breakdown in coordination. Such breakdowns occur when expenditure switching effects are dominated by the income effects of greater policy discipline. Market regimes will therefore have greater importance than the process of policy making in the “New Europe”

The Improvement in Indonesia's Real Resource Alance, 1986–89: Absorption, Switching and Growth Effects1

This paper seeks to quantify the immediate determinants of the large improvement in Indonesia's real resource balance (balance of trade in goods and services at constant prices) over the period 1986–89. The paper uses a framework which distinguishes between tradable and non-tradable products to decompose the change in the real resource balance into the effects of changes in absorption, expenditure-switching, output-switching and economic growth. The results show that each of the three annual increases in the real resource balance between 1986 and 1989 was the outcome of positive growth and expenditure-switching effects dominating negative absorption and output-switching effects. 1 The authors are grateful to three anonymous referees for their comments.

Selective policies under a structural foreign exchange shortage

Standard adjustment programs emphasize excessively demand-reducing adjustment mechanisms in economies facing a binding external constraint. The main policy instrument used to induce expenditure-switching and supply effects is the exchange rate. Despite its evident relevance, this instrument by itself cannot deal with the diversity of elasticities and transmission mechanisms. In the first section of this paper we provide evidence to show a clear non-first-best economic situation in Latin America during the eighties. The region exhibits significant maladjustments in the size and composition of output and demand, with a concomitant underutilization of installed capacity and a strong reduction in investment. In the second section we provide some theoretical examples on how changes in the size and composition of fiscal revenues and expenditures may help in reducing the undesired effects of external adjustment processes. We also argue that an active exchange rate policy may generate adverse fiscal effects if not accompanied by an adequate change in taxes and/or expenditures. These examples consider a model where output of non-tradable goods is sensitive to the size and composition of domestic demand while output of tradable goods is sensitive solely to relative prices. The difference in transmission mechanisms is the basis to argue for a greater diversity of policy instruments involved in adjustment programs – or selective policies.

Exchange Rates, Tight Money, and Macroeconomic Policy: a Comment

In a paper recently published in this journal, Lai and Chen (1984) compare the relative effectiveness of fiscal and monetary policies under fixed and flexible exchange rates, incorporating effects of a devaluation. They focus on the relative magnitude of expenditure switching and tight money effects in the Mundell-Flemming model. They conclude that this relative magnitude is the critical condition determining the relative effectiveness of fiscal and monetary policy when there is zero capital mobility. In addition, this relative magnitude is part of the critical condition when capital mobility is allowed. This note points out an ambiguity in the notion of relative effectiveness of a policy instrument across exchange rate regimes and amends Lai and Chen's results when an alternative definition is chosen. We