RESTRICTED
4 -
therefore supported the continued link to the dollar. He particularly
disagreed with Bonzom's suggestion of a single step appreciation. After the
initial change in the exchange rate, there would be no greater control over monetary policy than existed now. This point was also made by Al Tuwaijri
(Saudi Arabia), who also supported the Hong Kong authorities' commitment to
maintaining the current exchange rate.
7.
De Groote (Belgium) said that it was important to weigh up properly
the costs and benefits of current policy, which implied a continuing steady rate of uncomfortably high inflation, against the potential costs and benefits
associated with the possible alternatives. He wondered whether it was
really feasible to control property sector inflation while negative real
interest rates prevailed, and how much room there was in practice to increase
the supply of imported labour without incurring social problems and other
potential difficulties associated with changing wage structures. He did not
favour introducing a consumption tax at this stage because, in his view, it
could aggravate the inflationary pressures. In addition, he suggested that
introducing a broadly based income tax might simply lead to greater 'fiscal
emigration'. In these circumstances, he thought that the authorities might
ultimately have to consider an adjustment to the exchange rate. After
mentioning various possible ways that this could be carried out, he finally
suggested that, in general, it was easier to implement a discrete revaluation
or devaluation, when it is accompanied by another more conspicuous policy
change, like for example a shift to using the SDR as the peg instead of the US
dollar.
8.
Vegh (Argentina) agreed with the assertion in my Buff statement that
the linked exchange rate system built in discipline to the monetary system,
under which money supply adjusted to the balance of payments pressure and the
government had little discretion to pursue an expansionary monetary policy
which would aggravate inflationary pressure. Recent real appreciation of the
exchange rate was acting as an automatic stabiliser. On fiscal policy, he
agreed with the position of Wei in his Buff who had warned of the risks
associated with excessive growth of government spending. However, he noted
that the whole world was now trying to implement the sort of free market, low
RESTRICTED
it.