Stabilization programs in open economies typically consist of two stages. In the first stage the rate of currency devaluation is reduced, but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves, making a future policy change necessary. Only later, at a second stage, is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit. We study how different second-stage policy changes affect economic dynamics during the first stage. These changes include tax increases, budget cuts on traded and nontraded goods, and increases in the growth rate of money.

The authors study international trade between the North and the South where the industrial sector produces goods of different quality. The North exports high-quality products, the South low-quality products. Faster population growth in the South changes the spectrum of products exported by every country, and so does faster technical progress in the southern industrial sector. The latter leads also to the introduction of new high-quality products and the abandonment of old low-quality products. In all cases, there is a product cycle; the North abandons the production of its lowest-quality products which are subsequently produced in the South.

[Exchange rate management is possible only if the government pursues consistent monetary and fiscal policies. We construct a model in which the real consequences of exchange rate management depend on the precise time pattern of these policies. We study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targetting. Our theoretical results are consistent wit exchange rate-managed disinflation attempts in Argentina, Chile, and Israel.]

We develop a model of North-South trade in which the North exports high-quality and the South exports low-quality industrial products. Faster technical progress in the southern industrial sector leads the North to introduce new high-quality products and the South to abandon low-quality products. Production of northern low-quality products is shifted to the South. We also study the effects of technical progress in the North and population growth.