Inventory Changes, Unemployment and Discretionary Adjustment Policies

Abstract

Following the Second World War, economists came to place more and more emphasis on the implications of discretionary economic policies for balance-of-payments adjustment. Attention began to turn away from the role of automatic price adjustments through gold-standard or flexible exchange-rate systems to the role of monetary and fiscal policies and trade restrictions. The difficulties alluded to earlier, about the reliability of the price mechanism to achieve adjustment were increasingly recognised; that is, serious, undesirable dislocations might arise as that adjustment process worked itself out. It became clear that in the short run there could arise conflicts between policy objectives, e.g. between full-employment and balance-of-payments equilibrium. It is the purpose of this chapter to elaborate on some of the reasons why these difficulties may occur and to show how various ‘policy packages’ might work.