Working Paper: CEPR ID: DP406
Authors: David Vines
Abstract: This paper responds to the important pedagogical exercise of Khan and Montiel (1989). Those authors integrate the Polak monetary model of macroeconomic adjustment with a two-gap growth model to study `adjustment with growth'. Here we nest both the Polak and the Khan and Montiel models in a very conventional macro-model. We first study the effects of a negative external shock and argue that adjustment with growth would not be achieved from adjustment policies on either the Polak or the Khan and Montiel models. We conclude that in the design of growth-oriented based adjustment programmes, attention should be paid to supply-side features not present in the Khan and Montiel model, and suggest that such programmes require a wider range of measures than appears necessary from that model.
Keywords: balance of payments; adjustment; growth; less developed countries
JEL Codes: 133; 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adjustment policies based on the Polak model (O24) | adjustment with growth (O00) |
| Adjustment policies based on the Khan and Montiel model (F32) | adjustment with growth (O00) |
| Negative external shock (D62) | adjustment with growth (O00) |
| Fiscal contraction (E62) | growth-sustaining increase in capacity (D25) |
| Price rigidities and real exchange rate depreciation (F31) | adjustment with growth (O00) |