Project Appraisal and Foreign Exchange Constraints

Stiglitz, Joseph E.; Blitzer, Charles; Dasgupta, Partha

This article focuses on the complexities involving project appraisals and foreign exchanges in the U.S. It is convenient to suppose that the government simultaneously optimizes with respect to all variables within its control, and it is the implication of this supposition that has been explored in much of the recent literature on project evaluation. But as a model of government behavior it is not persuasive. Moreover, the analysis of government behavior becomes critical in situations where prices and wages are not perfectly flexible. A full-Optimum allocation of resources is, under quite general circumstances, characterized by overall production efficiency for the economy. If trade possibilities exist these are included as production options. Distorting taxes are then a device by which the government can hope to increase social welfare. It is then possible to show that under fairly general circumstances a second-best optimum is characterized again by overall production efficiency.



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Economic Journal

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May 1, 2013