Elasticity Pessimism, Absorption and Flexible Exchange Rates
The remarkable resurgence of interest in flexible exchange rates — which has even invaded circles, such as central banks, where formerly the subject was close to anathema — is doubtless in considerable measure inspired by the now justly famous ‘Tinbergen Principle’: the rule that, to assure the attainment of policy goals, the makers of policy need as many techniques as they have objectives. According to this criterion, if those in power want full employment and price stability and a high rate of capital formation and international balance without direct controls, they cannot hope to achieve these objectives by relying on only one or two techniques, such as variation in the money supply or in the level of government expenditure. Only by a happy coincidence will all objectives be attained if the number of tools is less than the number of goals and, in the absence of such an unlikely conjuncture, the most that can be achieved is some kind of ‘second-best’ compromise involving ‘trade-offs’ between, for example, employment and price stability, or employment and liberal trade policies.
KeywordsExchange Rate Price Elasticity Flexible Exchange Rate Exchange Rate Change Money Income
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