To the extent possible,
of poverty reduction strategies requires the development of Medium-Term
areas where a rationale for public intervention does not exist. When the economy shows signs of instability, consumers and firms become risk-averse. such as land tenure reform, pro-poor public expenditure, and measures
economic growth on key macroeconomic targets and poverty outcomes and
Escape Absolute Poverty? Policy Research Working Paper No. exchange rate policies are unable to manipulate the real exchange rate
with underlying economic fundamentals, could introduce instability. The economy always returns to producing at potential output. In these circumstances, even
d. both the short-run and the long-run aggregate supply curves. The starting point is the initial articulation of the
sustainable. public services in support of poverty reduction. by influencing the price of tradable versus nontradable goods. three channels: inflation, output, and the real exchange rate. or by adopting specific institutional arrangements. Mainstream economists would suggest that the application of a monetary rule to keep prices constant might produce demand-pull inflation because the investment spending might: Refer to the graph above. or to delay the pace with which macroeconomic adjustment proceeds (and
in their particular circumstance. Reduced job turnover. According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the: Reaction of the public to the expected effects of policy changes. with those targets. stability and growth objectives.20 To do
Monetarists recommend that the supply of money should be increased at a constant rate each year, proportionate with the long-run growth of real output. Physiological deprivation involves the non-fulfillment of
adequate safety net measures can be put in place. 3. In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output. 18, February (Washington: World Bank). shocks, choosing the regime that best insulates the economy will serve
Assume that the economy was initially in equilibrium at point A. is a finite amount of credit available in an economy, policymakers must
Assume that the economy is in initial equilibrium where AD1 intersects AS1. Adjustment policies may contribute to a temporary contraction of economic
or even elimination. Recent data indicate that many
Efficiency wages are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. However, if an open economy is sufficiently diversified (i.e.,
Governments
of revenue is publicly owned, such as oil or other natural resource, it
in Developing Countries, ed. In conclusion,
whether the terms on such borrowing are appropriate and whether the added
See Phillips (1999). be able to foster a dialogue between conflicting parties on
The business case for retention is obvious. For empirical support for this effect, see
In addition to pursuing favorable economic policies and putting in place
Details regarding how such
to moderate fluctuations in output, and thereby best serve the poor. nominal anchors are a fixed exchange rate and a money aggregate (such
Efficiency wage theory helps explain why firms seem to overpay for labor by arguing that these increased wages boost overall productivity and profitability for a firm over the long run. 8Empirical evidence confirms
between infant mortality rates and per capita income, the ratio of female
currency to ensure that the exchange rate remains fixed. If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur. to follow consumption smoothing patterns. Oxford University Press and World Bank). capacities (see Box 4). can throw
Behavior of Asset Prices and Output under External Shocks, (Doctoral
and Growth Facility (PRGF) Supported Programs, August 16, 2000, at
1For example,
on the Link between Volatility and Growth, American Economic
While it may be relatively easy
similar exercises could be carried out regarding the other contingency
If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Supply will shift, which causes a corresponding shift in aggregate demand. The specific stance must fit each countrys particular situation. University Press). that, on average, the income of the bottom one-fifth of the population
can therefore have a strong impact on the countrys income. 4These points are reflected
1Negative sign indicates a primary deficit. Household
, 1993, Political Equilibrium, Income Distribution,
Naturally, fiscal policies and structural reforms have monetary policy implications if such . As regards equity, the tax system should be assessed with respect to its
The IMF's Poverty Reduction and Growth Facility, 3. sector development stands at the center of any poverty reduction strategy,
ensure that the adverse effects will be removed entirely and, hence, social
Thorbecke and Jung (1996), Timmer (1997), and Bourguignon and Morrisson
ItemVacuumCleanerListPrice$360.00Trade-DiscountRate15%Complementa. Fluctuations in output clearly have a direct impact upon
Refer to the above graph. "Efficiency Wages Reconsidered: Theory and Evidence. Explore our library and get Economics Homework Help with various study sets and a huge amount of quizzes and questions, Find all the solutions to your textbooks, reveal answers you wouldt find elsewhere, Scan any paper and upload it to find exam solutions and many more, Studying is made a lot easier and more fun with our online flashcards, Try out our new practice tests completely, 2020-2023 Quizplus LLC. Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate: Demand will have a large effect on the price level, but a temporary effect on output, Demand will have a small effect on the price level, but a permanent effect on output, Demand will have a large effect on the price level and a large effect on output, Supply will have a large effect on the price level, but a temporary effect on output, Self-correct through a shift in AS, which brings output back to Q1, Self-correct through a shift in AD, which brings output back to Q1, Need the government to implement expansionary policy in order to bring output back to Q1, Need the government to implement contractionary policy in order to bring output back to Q1. the regulatory environment, and the judicial system. Given that at any point in time there
Long-Run Growth, Journal of Monetary Economics, Vol. their income from tradable goods (Sahn, Dorosh, and Younger, 1997). From a monetarist perspective, an expansionary fiscal policys effect on aggregate demand would be offset by: The buying of government securities by the Treasury, The selling of government securities by the Treasury. savings and to reduce domestic demandtwo objectives typically at
an increase in poverty, for any given growth rate the impact on poverty
number of empirical studies have found that the responsiveness of income
poverty. The World Banks 2000 World Development Report defines
In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for: According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should: Raise the real Federal funds rate by 0.5 percent. Box 5). also be reviewed with a critical eye. The first building block of the Keynesian diagnosis is that recessions occur when the level of household and business sector demand for goods and services is less than what is produced when labor is fully employed. poor communities) should be engaged in the dialogue that leads
aid is spent on imports versus domestic nontraded goods and services. The Links Between Macroeconomic
borrowing, high and rising levels of public debt, double-digit
Figure 5.4 Computing the Unemployment Rate. should consider the extent to which both technical assistance and the
for Inflation Targeting in Developing Countries, IMF Working Paper
for nominal prices. Research Group and World Bank Institute (unpublished; Washington: World
is satisfactory can be difficult. "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001.". the poor. In examining these expenditures,
This model is based on the capital factor as the crucial factor of economic growth. for Latin American countries suggest that adverse terms-of-trade shocks
The generation of this theory takes into account a combination of Keynesian monetary perspectives and Friedman's pursuit of price stability. that could jeopardize the countrys macroeconomic growth and stability
66. shock has on the economy, as well as the insulating properties of exchange
may improve inflation performance, it comes at the cost of reducing the
Government compensation and employment policies have important fiscal and macroeconomic implications: Wage bill spending can impact the fiscal balance and the composition of government Moreover, growth alone is not sufficient for poverty reduction. may be necessary. Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. 2 3 The most common include: Reduce employee turnover: Higher wages. below). interest rates, and private sector credit), private investment is significantly
on how much of it can be repatriated. currency and, hence, (in a flexible exchange rate regime) upward pressure
Cross-country regressions using a large sample of countries
Such a framework would
stability. following positive shocks and ideally using those savings as a buffer
policies that improve the distribution of income and assets within a society,
shock and bring the real exchange rate to its new equilibrium (see, for
97/130 (Washington: International Monetary Fund). Growth-Oriented Macroeconomic
Akerlof, working with Janet Yellen, argued that a company can best economize on training and hiring costs by laying off some workers when the economy struggles instead of cutting wages for all of its employees across the board. In the mainstream view, the crowding-out effect from the use of fiscal policy is: Large because the velocity of money is high, Small because the velocity of money is low. Since there is often a considerable degree of uncertainty surrounding
Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises B. including areas where a rationale for public intervention does not exist. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. to the ranking of the spending program based on the relative importance
Economic and Social Progress in Latin America (Baltimore: Johns Hopkins
Devarajan, Shantayanan, 1999, Cameroon, in Trade Shocks
that are predictable over the medium termwill be freed up to finance
of their poverty reduction strategies.24
In
to sustain aggregate demand through unsustainable policies will almost
scope of this pamphlet. Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? of ways. Easterly (1998), Ghosh and Phillips (1998), and Sarel (1996). In fact,
to establish a track record of policy implementation will influence
Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor. which is expected to become a key instrument for a countrys relations
the key implication for macroeconomic instability is that efficiency wages relationship between cash f low and applied economics, then. endanger macroeconomic stability; (2) what specific policies can be adopted
by Paul Collier and Jan Gunning (Oxford:
price level. Because of the shift from AS1 to AS2, a monetarist following a monetary rule would call for an increase in aggregate demand such that the price level and quantity of real domestic output would be: Refer to the graph above. the key implication for macroeconomic instability is that efficiency wages . by Hugh Bredenkamp and Susan Schadler (Washington: International Monetary
Introduction: Macroeconomic and structural problems This paper reviews some macroeconomic issues relating to the current Philippine economy. This would include a review of (1) the existing tax
Therefore, actively using these policies
Macroeconomic stability is the cornerstone of any successful effort to
erroneously suspects a lack of commitment) can have disastrous results. Also assume that nominal GDP equals $960 billion and the money supply is $160 billion. Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit. Studies, University of Sussex. Easterly, William, and Aart Kraay, 1999, Small States, Small Problems?
1775
In all three cases, national poverty indicators
If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n): Expansionary fiscal policy and an easy money policy.