Monetary Adjustment And Policy Compatibility In A Controlled Open Economy

Document Type

Article

Publication Date

5-1-1995

Published In

Journal Of African Economies

Abstract

This paper extends the classical analysis of monetary adjustment under a fixed exchange rate to the open, agrarian, and heavily controlled economies of Sub-Saharan African during the 1970s and 1980s. When the central bank is illiquid, monetary adjustment takes place through changes in domestic credit rather than through payments imbalances; and if expenditure requirements are rigid, macroeconomic sustainability requires that the government exploit the revenue potential implicit in its controls. The automatic adjustment mechanism can break down if the government transfers the rents generated by its control regime to the private sector, or if it imposes price controls and fails to adjust them to a change in government spending. In the latter case, the cash economy can implode, as in Tanzania 1979–84. The analysis formalizes and extends arguments presented in Bevan et al. (1990), Controlled Open Economies.

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