Agriculture Reference
In-Depth Information
The 'standard' closure except that the drect tax rate adjusts to
maintain a government deficit that is fixed as a proportion of GDP.
Closure 5, except that capital controls are removed.
20
The short-run shocks are smaller than those admnstered n the long
run, on the assumption that such reforms will be phased in over a period
of five years. The results for the first four closures are presented in Table
A9.8 and those for the last two are presented in Table A9.9. In general, it is
clear that the short-run effects of the trade reform are heavly dependent
on the surrounding macroeconomic policy regime. Indeed, the effects range
from the contracton alluded to n the ntroducton through to consderable
short-run expanson.
•
•
The effects of captal controls and the choce of monetary polcy
target
In broad terms, the behaviour of the model in the short run with rigid capital
controls retained can be represented as in Figure A9.3. The upper diagram
represents the domestc captal market and the lower one the domestc
market for foregn products. These markets are lnked by the requrement
that, for a balance of payments, net flows on the capital account must
mrror those on the current account. Net demand for foregn products
(the downward sloping line in the lower diagram,
NM=M-X
) depends on
the relative price of foreign goods. For this purpose we define the real
exchange rate as the common-currency rato of the prce of home goods
to the prce of foregn goods
P
Y
P
Y
(3)
e
=
E
=
R
P
*
P
*
E
where, as before,
E
s the nomnal exchange rate n foregn currency per
unit of home currency,
P
Y
is the GDP deflator and
P*
s the foregn prce
level. In the numercal model a real effectve exchange rate s estmated
as the trade-weghted average of the rato of the home and the foregn
GDP deflators. Net imports depend positively on this and negatively on its
nverse (the common-currency foregn to home product prce rato). Ths
