Working Paper: NBER ID: w3702
Authors: Stanley Fischer
Abstract: The 1980s were both the lost decade of growth for much of Latin America and Africa, and the period in which -- through the new growth theory -- macroeconomists returned to the study of growth and development. The new growth theory is production function driven and concerned primarily with steady states, and has paid little attention to the role of macroeconomic policy -- as reflected for instance in the rate of inflation and the budget deficit -- in determining growth. This paper presents a variety of evidence that macroeconomic policies matter for long-run growth. First, macroeconomic variables enter the typical new growth theory cross-country regressions with statistical significance and the expected signs. Second, evidence from large multi?country case studies, and from case-studies of Chile and Cote d'Ivoire presented in the paper, shows that macroeconomic policy choices have had a significant impact on growth over periods of more than a decade. The conclusion is that macroeconomic policy choices, including the budget deficit, the exchange rate system, and those choices that determine the inflation rate, matter for long-term economic growth.
Keywords: macroeconomic policy; economic growth; inflation; budget deficit; new growth theory
JEL Codes: E60; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic policies (E60) | long-run growth (O49) |
| inflation rate (E31) | growth rates (O40) |
| budget deficit (H62) | growth rates (O40) |
| effective management of macroeconomic policies (E60) | faster growth (O49) |
| macroeconomic policies (E60) | investment (G31) |
| inflation (E31) | costs associated with inflation (E31) |
| government's perceived ability to manage the economy (H11) | inflation (E31) |