11.1.3—Switching vs reducing policies

Expenditure-switching policies shift spending from imports toward domestic goods, often through depreciation or protection. Expenditure-reducing policies lower total domestic spending, often through contractionary fiscal or monetary policy.

Switching may improve net exports but can create imported inflation or retaliation. Reducing demand can cut imports but also lower output and employment. The elasticities, spare capacity and time horizon determine the result.

A depreciation may switch demand toward domestic exports; a tax rise may reduce spending on both domestic and imported goods. Combining them can address different mechanisms but increases trade-offs.

A fall in imports after a recession is not automatically a successful switching policy; distinguish changed composition from reduced total demand.