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Coping with a foreign exchange crisis: A general equilibrium model of alternative adjustment mechanisms. (English) Zbl 0574.90090

The problems posed by a shortfall in foreign exchange have received great attention recently, much of it focused on the often painful measures developing countries impose to cope with the shortfall. This paper shows how a computable general equilibrium (CGE) model that is essentially Walrasian can be modified to reflect some of the more common adjustment mechanisms to which developing countries often resort. The adjustment measures often do not rely on price adjustment and so represent important departures from the Walrasian spirit of the model. In particular, the paper considers the welfare effects of exchange rate, import premium, and quantity rationing adjustment mechanisms. The model also incorporates ”rent seeking” activities generated by rationing mechanisms. The numerical results, using data for Turkey, show that welfare losses are smallest when the exchange rate is free to clear the foreign exchange market and largest for quantity rationing. The costs associated with rent seeking are the most important source of welfare loss, far outweighing allocational inefficiencies arising from the use of quantity rationing.

MSC:

90C90 Applications of mathematical programming
91B66 Multisectoral models in economics
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