Monetary and Economic Studies Vol.5, No.2 / September 1987

Are There Reliable Adjustment Mechanisms?

James Tobin

Once upon a time economics students of my generation learned the theory of international payments adjustment. We marveled at the natural mechanisms which, in principle at least, corrected the imbalances that triggered them. The subjects, even the words, still appear in modern textbooks (for example, Dornbusch (1980)), although they have been swallowed in "open economy macroeconomics," or in what might be called "multi-national macroeconomics" were that subject advanced enough to merit a label. Both the world and the models economists build to model it are vastly more complex than students of my day were led to believe and did believe. Nevertheless, exploiting the license a keynoter has for imprecision and impressionism, I propose to review several possible adjustment mechanisms and to consider their applicability in today's world.
I shall in the end be skeptical that there are any reliable mechanisms. This conclusion, I suspect, is widely shared -if rarely voiced -among economists, and especially among practitioners and policy-makers in international finance. Perhaps it is a premise of this very conference. The universal call for coordination of national macroeconomic policies betrays a strong suspicion that absent such coordination the system will not equilibrate itself. The suspicion might be that the natural, automatic mechanisms are weak or perverse, or that they are frequently obstructed and per-verted by unconcerted national policies.
With "endogenous politicians," in Assar Lindbeck's phrase, it may be difficult to distinguish policy responses from market responses. Several endogenous politicians are gathering at Venice this month, and effcctive coordination is not likely to be one of their responses. In the old days, in contrast, the mechanisms of payments adjustment were not thought to leave much room for discretionary national policies, concerted or disparate, for good or for ill.
I shall discuss both short-run and long-run adjustments, to both nominal and real shocks. The two distinctions are interrelated; nominal shocks and adjustments are relatively more important in short runs.

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1987 Bank of Japan All Rights Reserved.

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