Agriculture Reference
In-Depth Information
employment and GDP. Therefore, the floating rate regime with consumer
prce targetng gves a better short-run outcome when captal controls are
relaxed than a fixed exchange rate because there is a smaller deflation
and hence greater employment growth. The superiority of the floating rate
regme would have seemed even stronger had the target of monetary polcy
been set, instead, at
P
Y
. Then there would have been a lttle (unantcpated)
CPI inflation and employment would have expanded further.
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To summarse the monetary polcy effects: when captal controls are
weak or non-existent, the trade liberalisation attracts increased inflows on
the captal account to mtgate the real deprecaton and assocated GDP
price deflation that are its inevitable consequences. The real volume of
domestic investment rises irrespective of the target of monetary policy, as
does the level of GDP. The choice of monetary policy target still matters,
however, with CPI targeting offering a smaller GDP price deflation, more
modest gains in the real production wage, and better short-run GDP
gans.
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Fiscal policies
The fiscal impact of the trade reform comes through the associated decline
in tariff revenue. Only two fiscal policies were considered. Fiscal policy 1
has no tax revenue swtch. Government spendng contnues at a constant
share of GDP and all rates of direct and indirect tax are held constant,
except tariffs, which are reduced. The result of the trade liberalisation is
therefore an expanded fiscal deficit. This is the fiscal policy applying in
the simulations reported in Table A9.8. Fiscal policy 2 has the lost revenue
made up via an increase in the direct tax rate, so that the fiscal deficit,
government revenue and government spendng are all mantaned as
constant proportions of GDP. The responses to the two fiscal policy regimes
are compared n Table A9.9.
As with monetary policies, the ranking assigned to the two depends on
the strength of captal controls. In the presence of tght captal controls
(that keep net flows on the capital account constant) policy 2 outperforms
policy 1 in terms of GDP expansion. This is because the expanded fiscal
deficit under policy 1 adds to the demand side of the domestic capital
