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What macroeconomic policies are"sound?"

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  • Dailami, Mansoor
  • Ul Haque, Nadeem

Abstract

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 choices.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1995.

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Date of creation: 31 Oct 1998
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Handle: RePEc:wbk:wbrwps:1995

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Keywords: Economic Theory&Research; Fiscal&Monetary Policy; Payment Systems&Infrastructure; Banks&Banking Reform; Environmental Economics&Policies; Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Economic Theory&Research; Macroeconomic Management;

References

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  1. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  3. Dailami, Mansoor & Leipziger, Danny, 1997. "Infrastructure project finance and capital flows : a new perspective," Policy Research Working Paper Series 1861, The World Bank.
  4. Nadeem Ul Haque & Manmohan S. Kumar & Nelson Mark & Donald J. Mathieson, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 688-724, December.
  5. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  6. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Harvard Institute of Economic Research Working Papers 1724, Harvard - Institute of Economic Research.
  7. Tomás J. T. Baliño & Charles Enoch & William E. Alexander, 1995. "The Adoption of Indirect Instruments of Monetary Policy," IMF Occasional Papers 126, International Monetary Fund.
  8. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
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Cited by:
  1. Nancy Birdsall, 2006. "Stormy Days on an Open Field: Asymmetries in the Global Economy," Working Papers 81, Center for Global Development.
  2. Nancy Birdsall, 2002. "A Stormy Day on an Open Field: Asymmetry and Convergence in the Global Economy," RBA Annual Conference Volume, in: David Gruen & Terry O'Brien & Jeremy Lawson (ed.), Globalisation, Living Standards and Inequality: Recent Progress and Continuing Challenges Reserve Bank of Australia.

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