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Growth, integration, and macroeconomic policy design: Some lessons for Latin America

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  • Begg, David

Abstract

Even the richest countries face the ongoing challenge of how to combine monetary and fiscal discipline with sustainable growth. Increasingly, it is recognized that growth requires not merely factor accumulation but the appropriate market and political institutions. Rich countries are rich partly because of their past success in resolving these issues. This paper gives an overview of economic performance in Latin America, showing output growth, inflation, and the evolution of budget deficits. Then, it introduces a simple model, based on Begg (2000, 2001), capturing the interaction of macroeconomic policy and structural reform. Reform is costly today but improves future opportunities. These benefits may apply to means or variances. By increasing robustness to shocks, reforms that enhance labor market flexibility reduce the variance of output. Other reforms, by affecting means not variances, reduce systematic distortions that depress potential output. Finally, it examines the optimal speed of reform under different macroeconomic regimes, and hence isolates the effects of the choice of regime on the pace of reform. In general, in more distorted countries (or regimes) the benefit of reform is greater. Hence, regimes that inefficiently mitigate distortions should induce faster reform. Consequently, if dollarization or other policy changes reduce distortions, they should (optimally) slow the pace of reform.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 13 (2002)
Issue (Month): 3 (December)
Pages: 279-295

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Handle: RePEc:eee:ecofin:v:13:y:2002:i:3:p:279-295

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Web page: http://www.elsevier.com/locate/inca/620163

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  1. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  2. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  4. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
  5. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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