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Modeling the macroeconomic requirements of policy reforms


  • Easterly, William
  • Hwa, E. C
  • Kongsamut, Piyabha
  • Zizek, Jan


The model presented in this paper is in between RMSM-X and RMSM-XX in that, unlike RMSM-X, it does incorporate behavioural functions for the main macroeconomic variables, namely private consumption, private investment, money demand, demand for quasi money,export supply, and import demand. However, unlike RMSM-XX but like RMSM-X, it is solved recursively for residual variables. The user specifies"target values"for the real exchange rate, real interest rate, and the inflation rate. The model then determines the public sector behaviour consistent with attaining these targets. In an alternative solution, described in Appendix II, the model also permits setting exogenously the public sector variables and determining the private sector behaviour necessary to reach the policy targets. Finally, the model is generalized to take into account external financing constraints by making the real exchange rate exogenous. The model is then used to derive the macro adjustment required by trade and financial liberalization.

Suggested Citation

  • Easterly, William & Hwa, E. C & Kongsamut, Piyabha & Zizek, Jan, 1990. "Modeling the macroeconomic requirements of policy reforms," Policy Research Working Paper Series 417, The World Bank.
  • Handle: RePEc:wbk:wbrwps:417

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    References listed on IDEAS

    1. Van Wijnbergen, Sweder, 1985. "Trade reform, aggregate investment and capital flight : On credibility and the value of information," Economics Letters, Elsevier, vol. 19(4), pages 369-372.
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    3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    4. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 05/4, International Monetary Fund.
    5. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-3.
    6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    7. Ritu Anand & Sweder van Wijnbergen, 1988. "Inflation, External Debt and Financial Sector Reform: A Quantitative Approach To Consistent Fiscal Policy With An Application to Turkey," NBER Working Papers 2731, National Bureau of Economic Research, Inc.
    8. Craig Burrnside, 2005. "Fiscal Sustainability in Theory and Practice : A Handbook," World Bank Publications, The World Bank, number 7495.
    9. Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139, January.
    10. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
    11. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria; Any Role for Rules?," IMF Working Papers 03/155, International Monetary Fund.
    12. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
    13. Hana Polackova Brixi & Allen Schick, 2002. "Government at Risk : Contingent Liabilities and Fiscal Risk," World Bank Publications, The World Bank, number 15233.
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