The Composition of Government Spending and the Assignment of Instruments to Targets in a Small Open Economy: Comment

Lai, Ching‐chong; Chang, Wen‐Ya; Chu, Yun-Peng

doi:10.2307/1059385

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(2 citation statements)

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“…As under perfect capital mobility, it would be impossible for the monetary authorities to ster ilize indefinitely; otherwise, the resultant loss of foreign reserves would be infinite. For a detailed explanation, see, for example, Swobo da (1972) and Lai, Chang, and Chu (1990). 7.…”

Section: Discussionmentioning

confidence: 99%

“…However, Lai, Chang, and Chu (1990) demonstrate that, with perfect capital mobility and fixed exchange rates, the proper coordination between fiscal and exchange rate policies suggested by Ramirez (1988) is not feasible. They propose that the government should give up the use of its exchange rate as a policy instrument and instead introduce monetary policy associated with fiscal policy to achieve desirable internal and external tar gets.3 A common feature of the existing contribu tions on the assignment problem is that they ignore the role of the supply side, in particular the role of wage flexibility in the labor market.…”

Section: Introductionmentioning

confidence: 98%

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The Policy Assignment Principle with Wage Indexation

Chang¹,

Lai²

2002

The American Economist

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This paper is the first attempt to examine the role of alternative wage indexation schemes in coordina tion between fiscal and exchange rate policies to achieve given desirable macroeconomic targets under fixed exchange rates with perfect capital mobility. By introducing an explicit specification of the supply side similar to Sachs (1980) and Pitchford (1990) into the Mundell (1963) framework, we show that the crucial factor determining whether the mixture of fiscal and exchange rate policies will successfully work to stabilize output and official foreign reserves is the degree of wage indexation. Furthermore, we also show that such a finding under fixed exchange rates is robust when the analysis shifts to the sys tem of a managed floating regime.

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 98%