Re: stiglitz

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

3. Assume under your proposal that country A (with low income elasticity of
export (say less than one) and high (say greater than one) income elasticity
of imports is obviously not constrained by TH. LAw and decides to undertake
expansionary policies. Assume further that ther are no import restrictions.
Can't one outcome be a balance of payments disequilibrium? Can't a possibility
be a persistent balance of payments disequilibrium?
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Is it possible? anything is possible? Is it likely? No -- but even if it
occurs, then my IMCU proviso #8 takes into account what should be done in that
case-- where one must ditinguish between rich countries (and your possible
case) vis-a-vis relative poor countries.
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Then if I understand you correctly country A (middle income country)  is living beyond its means and needs to alter its standard of living. It should reduce its terms-of-trade. Whether it is through mini-devaluations (FMMRW, p.236) or for example´holding money income below the growth of domestic productivity in order to reduce market prices of domestic goods´(International Money and the Real World, 1992, p.236).

These are not obviously the only alternatives. I would have thought also that since proviso 6 guarantees the recycling of liquidity it could be a channel to transfer for example FDI flows to finance through the capital and financial account a current account deficit.

I don´t think my example is an unlikely example or an exotic case. Your proposal makes reference to rich and poor countries. I am not sure what happens exactly to the countries that are in the middle. Some middle income countries are price takers (import and export markets) and I don´t think that in that case devaluation is the answer.