| Abstract: |
The short-run adjustment problem in developing countries involvesboth the improvement of the current account and the reductionof inflation. In both cases, the usual reason for adjustmentis shown to be the fiscal deficit. The article distinguishesprimary adjustment costs, which are inevitable, from secondarycosts, which result, for example, from failure to devalue orfrom real wage rigidity. The article then analyzes the effectsof expenditure reduction and currency devaluation on varioussectors of the economy. Reducing inflation involves both aninflation tax replacement and a price adjustment problem, and"heterodox" policies designed to deal with the latter are discussed.If the fiscal deficit cannot be reduced, the article argues,improving the current account may be at the cost of increasinginflation and likewise reducing inflation may be at the costof worsening the current account. |
