Successful Adjustment in a Multi-Sectoral Economy

30 Pages Posted: 25 Jul 2007 Last revised: 10 Jul 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Date Written: April 1987

Abstract

This study analyzes the adjustment to a fiscal reform in a dependent economy. It evaluates the economic factors that are relevant for making the choice between a cut in employment versus a cut in wages as a means of reducing the fiscal wage bill. We demonstrate that in the presence of costly short-run mobility of labor there is a natural advantage to a wage policy over employment policy. Fiscal deficits can be dealt with successfully by a wage policy and with the corresponding adjustment in government demand. These policies may have only marginal consequences on production of traded gds in the short run in the presence of costs of adjustment. Over time the gain in the production of traded goods is determined by the credibility of the fiscal reform. It is shown that the absence of credibility may have major consequences on the adjustment, because it will depress the magnitude of the private investment associated with the fiscal reform.

Suggested Citation

Aizenman, Joshua, Successful Adjustment in a Multi-Sectoral Economy (April 1987). NBER Working Paper No. w2202, Available at SSRN: https://ssrn.com/abstract=346999

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

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