Inflation in nontradables and the macroeconomic policy mix: a model with policy application to transition economies

Hana Polackova
Authors registered in the RePEc Author Service: Hana Polackova Brixi

No 1702, Policy Research Working Paper Series from The World Bank

Abstract: The author analyzes the macroeconomic effects of inflation in the nontradables sector of a small open economy to suggest how different macroeconomic policies would facilitate structural adjustment after price liberalization in a transition economy. She uses a Mundell-Fleming rational expectations model of a two-sector economy to study how inflation in the nontradables sector affects the exchange rate, relative prices, wages, and, indirectly, the movement of factors of production. She applies the analysis to a cut in producer subsidies in the nontradables sector and assesses how macroeconomic policies involving the management of supply and demand might affect government objectives for the economy and redistribution. She concludes that to alleviate the transitory negative effects of a cut in producer subsidies, targeted household transfers combined with a tax cut, if possible, are superior to expansionary monetary and fiscal policies. Making the tax cut less than the cut in subsidies and financing targeted lump-sum household transfers from government savings reduce the risk of poverty and external imbalances. The potential benefits from exchange rate management depend greatly on the level of wage discipline.

Keywords: Fiscal&Monetary Policy; Economic Theory&Research; Environmental Economics&Policies; Markets and Market Access; Payment Systems&Infrastructure; Economic Theory&Research; Economic Stabilization; Environmental Economics&Policies; Access to Markets; Markets and Market Access (search for similar items in EconPapers)
Date: 1997-02-28
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi_page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:1702

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().