MACROECONOMIC POLICY & GROWTH

Macroeconomic Policy And The Distribution Of Growth Rates

Abstract

The ability to appropriate profits in exchange for research expenditures is specifically addressed by new growth theory. Last but not the least, macroeconomic policy and price competitiveness are important to growth. Despite all the caveats regarding lags in decision making and implementation, and despite of all policy inefficiency claims, the 1990s have shown that macroeconomic policy can be supportive of growth. Fiscal or monetary policy may reduce cyclical imbalances and uncertainty, and, through low interest rates, can encourage investment. Empirically-oriented studies - based either on evolutionary models or on management literature - stress price competitiveness and export market shares as important to medium-term performance; we therefore investigate the contribution of strategies to balancing costs and productivity, taxes and revenues, and to devaluating the currency. We group fiscal and monetary policy together with macroeconomic cost management under the term of a broadly defined “macroeconomic policy.” We examine the view that high-quality macroeconomic policy is a necessary, but not sufficient, condition for economic growth. We first construct a new index of the quality of macroeconomic policy. We then directly compare growth rate distributions across countries with good and bad policies; use Bayesian methods to examine the partial correlation between policy and growth; and outline how growth and steady-state income levels might have differed, had all countries achieved good policy outcomes. One finding is that bad macroeconomic policies can be offset by other factors, but the fastest-growing countries in our sample all shared high-quality macroeconomic management.

Table of Contents

Abstractii

Chapter 1: Introduction1

Background of the Study1

Problem of the Study3

Purpose of the Study3

Rationale of the Study4

Significance of The Study4

Research Questions6

Chapter 2: Relation to Existing Literature7

Chapter 3: Measuring macroeconomic policy16

Chapter 4: When is policy the weakest link?28

Chapter 5: Macroeconomic policy and growth regressions31

Chapter 6: Robustness36

Chapter 7: Counterfactual distributions47

Chapter 8: Conclusions53

References55

Appendices63

Chapter 1: Introduction

Background of the Study

A macroeconomic model links four-digit industry model of demand for industrial and production structure at the fair macroeconomic models and neoclassical models of the user cost of capital changed. At the broadest level, macro-economic stability of East Asia from the early 1960's and late 1990's could help explain why East Asian countries have sustained high growth rates. In contrast, sub-Saharan Africa and Latin America have experienced the painful combination of macro-economic turmoil and slower growth. Like most economists expect the macroeconomic mismanagement could be attributed to not only slow growth, but also why some developing countries have become heavily indebted. Even if slow growth is due to problems with external debt, the origins of the debt crisis may be, as a rule, until the political decision-making. Easterly (2005 1015) finds that in the group of Heavily Indebted Poor Countries (HIPCs) has been worse macroeconomic policies during 1980-97 as compared to other developing countries, even after controlling for income. Despite these observations may seem persuasive, the size of the empirical relationship between macroeconomic policies and growth remains disputed. One argument is that even where there is evidence of correlation, it arises only because of the slow growth in countries with a terrible ...