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External shocks, adjustment policies, and investment : illustrations from a forward-looking CGE model of the Philippines

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Author Info

  • Go, Delfin S.

Abstract

This paper presents a model that integrates intertemporal and forward-looking behavior in investment and consumption decisions in a multisectoral general equilibrium framework applicable to developing countries. It formulates and uses an infinite-horizon growth model to examine the adjustment, growth, and debt problems of a middle-income country, which the author illustrates using data for the Philippines. The author concludes that the expectation is a key factor. Contrary to the common suggestion that an economy should adjust and contract in response to a permanent import price shock, the behavior suggested in a model with rational expectations in investment decisions is that the opposite can be true. Combined with other policies, tariff reform could rechannel investment and resources toward the more tradable sectors and exports can be emphasized and increased. If domestic resources are also mobilized through increased tax collection, the combined effect will be to reduce or slow the accumulation of foreign debt. In other words, middle-income countries like the Philippines missed a golden opportunity for policy reform in the 1970s and found it harder to implement adjustment policies under less favorable circumstances in the 1980s.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 737.

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Date of creation: 31 Aug 1991
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Handle: RePEc:wbk:wbrwps:737

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Related research

Keywords: Environmental Economics&Policies; Economic Theory&Research; Financial Intermediation; International Terrorism&Counterterrorism; Banks&Banking Reform;

References

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  1. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  2. Balassa, Bela, 1986. "Policy Responses to Exogenous Shocks in Developing Countries," American Economic Review, American Economic Association, vol. 76(2), pages 75-78, May.
  3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  4. Victor Ginsburgh & Jean Waelbroeck, 1981. "Activity analysis and general equilibrium modelling," ULB Institutional Repository 2013/1649, ULB -- Universite Libre de Bruxelles.
  5. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  6. Solow, Robert M., 1987. "Growth Theory and After," Nobel Prize in Economics documents 1987-1, Nobel Prize Committee.
  7. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
  8. Jere Behrman, 1982. "Country and Sectoral Variations in Manufacturing Elasticities of Substitution between Capital and Labor," NBER Chapters, in: Trade and Employment in Developing Countries, vol. 2: Factor Supply and Substitution, pages 159-192 National Bureau of Economic Research, Inc.
  9. Tanzi, Vito, 1986. "Fiscal Policy Responses to Exogenous Shocks in Developing Countries," American Economic Review, American Economic Association, vol. 76(2), pages 88-91, May.
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Cited by:
  1. Lensink, Robert, 1995. "Foreign exchange constraints and developing countries," Economic Modelling, Elsevier, vol. 12(2), pages 179-191, April.
  2. Dirk Willenbockel & Abeer Elshennawy & Sherman Robinson, 2013. "Climate Change and Economic Growth: An Intertemporal General Equilibrium Analysis for Egypt," EcoMod2013 5325, EcoMod.
  3. Elshennawy, Abeer, 2013. "The Euro-Mediterranean free trade agreement and the cost of tariff liberalization in Egypt," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 326-338.

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