What Macroeconomic Policies are Sound?

39 Pages Posted: 20 Apr 2016

See all articles by Mansoor Dailami

Mansoor Dailami

World Bank

Nadeem Ul Haque

Pakistan Institute of Development Economics

Date Written: July 1998

Abstract

In the new globalized financial market environment facing developing countries, volatility has become an increasing fact of life. Faced with such volatility, what broad principles should guide their macroeconomic management?

Most people agree that the soundness of macroeconomic policies should be judged by their efficacy in meeting the objectives of steady growth, full employment, stable prices, and a viable external payments situation.

What people debate about are the links between macroeconomics and economic structure-and in the current environment, the openness to foreign capital flows.

As developing countries become more integrated into international financial markets, volatility may become an increasing fact of life. Faced with such volatility, how should these countries frame their macroeconomic policies? What broad principles should guide their macroeconomic management?

In many developing countries, the openness of the capital account has been significant. Many countries have made the transition toward an open-economic paradigm. As a result, fluctuations in international capital and currency markets, as well as shifts in foreign investors' attitudes and confidence, have greatly affected local stock market prices, the level of foreign exchange reserves, and the scope for monetary and interest rate policy.

Capital controls and foreign exchange restrictions have been significantly dismantled in a number of developing and transition economies.

In 1970, only 34 countries-or 30 percent of the International Monetary Fund`s membership-had assumed Article VIII of the IMF Articles of Agreement, declaring their currency convertible on current account transactions. By 1997, this figure had increased to 77 percent.

Does financial integration make it more difficult to achieve macroeconomic stability? Apparently not, on the whole, although at times large short-term capital flows can lead to misaligned asset prices, including exchange rates.

What financial integration does do is limit how far countries can pursue policies incompatible with medium-term financial stability. The disciplining effect of global financial and product markets applies not only to policymakers-through pressures on financial markets-but also to the private sector.

Rather than constrain the pursuit of appropriate policies, globalization may add leverage and flexibility to such policies, easing financing constraints and extending the time during which countries can make adjustments.

But markets will provide this leeway only if they perceive that countries are undertaking adjustments that address fundamental imbalances.

This paper-a joint product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute, and the Research Department, International Monetary Fund-was presented at the conference South Asia Beyond 2000: Policies for Sustained Catch-Up Growth, March 19-20, 1998, Colombo, Sri Lanka. The authors may be contacted at mdailami@worldbank.org or nhaque@imf.org.

Suggested Citation

Dailami, Mansoor and Ul Haque, Nadeem, What Macroeconomic Policies are Sound? (July 1998). Available at SSRN: https://ssrn.com/abstract=597197

Mansoor Dailami (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/mdailami

Nadeem Ul Haque

Pakistan Institute of Development Economics ( email )

Quaid-i-Azam University Campus, P.O. Box. 1091
Islamabad, Capital 44000
Pakistan
+92-51-9217879 (Phone)
+92-51-9210886 (Fax)

HOME PAGE: http://www.saneinetwork.net/structure/st_comm/NadeemUlHaque.asp

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
149
Abstract Views
2,522
rank
265,514
PlumX Metrics