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Exchange Rate Policy Dilemmas in the Presence of Macroeconomic Imbalance

In: Issues in Contemporary Economics

Author

Listed:
  • Maria Constantopoulos

    (Athens University of Economics and Business)

Abstract

In recent years the drachma has been crawling downwards at a pace insufficient to counterbalance the rise in domestic costs, especially labour costs. This was because of the government’s decision to keep the rate of inflation down despite excess demand caused by the large public-sector deficit. Profit rates in the sectors producing exportables and import substitutes were squeezed, discouraging production and leading to balance of payments deficits. My purpose in this paper is to show that the exchange-rate policy followed facilitated macroeconomic imbalances and particularly overspending in real terms by the government. Furthermore it had two negative consequences: 1. It punished the productive, traded goods sector of the economy at a time when it needed all the help it could get. 2. It shifted the burden of adjustment on to the level of foreign exchange reserves and led to a dead-end out of which only a substantial devaluation with consequent inflation can drive the economy.

Suggested Citation

  • Maria Constantopoulos, 1992. "Exchange Rate Policy Dilemmas in the Presence of Macroeconomic Imbalance," International Economic Association Series, in: Thanos S. Skouras (ed.), Issues in Contemporary Economics, chapter 9, pages 113-126, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-11955-4_9
    DOI: 10.1007/978-1-349-11955-4_9
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