Balance of Payments Aspects
The mixes suggested in the preceding chapter for reducing the upward pressure on prices at any given level of activity will also thereby improve a country’s competitive position at any given exchange rate, or tend to cause the exchange rate to appreciate if it is free to do so. This is partly because of the downward pressure on prices that a shift of mix in one of these directions exerts over the period in which it is introduced. But, in addition, the mix that involves a tightening of monetary policy and lower taxes tends to improve the capital account of the balance of payments, at least in the immediate future; though this may be expected eventually to lead to a greater outflow (or a smaller inflow) of interest and dividends, which will at that future time make the balance of payments or the exchange rate to that extent weaker than it would have been (at the same level of activity) if the change of mix had not occurred. The mix involving higher government spending and tighter monetary policy may be expected to have similar effects on the capital account, and so on future flows of interest and dividends; whilst the effect on the capital account of that involving reductions in both tax revenue and government spending (as a proportion of GDP) is uncertain.
KeywordsExchange Rate Monetary Policy Competitive Position Nominal Interest Rate Capital Inflow
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