ABSTRACT
In the last chapter we described the analytics of the standard policy model for stabilisation and growth. This chapter simulates a small macroeconomic model of DEs, which explicitly covers the basic interrelationships between money and the real economy. With the help of the model some simulation experiments are carried out in order to analyse and compare the effects of different monetary, fiscal and exchange rate policy measures on certain macroeconomic variables and also on the economy as a whole. Macroeconomic management in DEs has typically been demand-oriented with little emphasis on supply-side policies, since the aim has been to achieve short run stabilisation. This ignores medium term growth, given
the implicit assumption that productive capacity is exogenous. Such neglect of medium run growth in the adjustment process came under vehement criticism in recent years as persisting external and internal imbalances led to a slackening in growth, BOP difficulties, and high inflation. The cause of the short run disequilibria has frequently been traced to a situation of government fiscal deficits that end in excessive monetary expansion and feed domestic demand. Stabilisation programs (whether sponsored by the IMF or otherwise) are typically put into effect to reduce these demand pressures. A financial (or stabilisation) program is a package of policies designed to eliminate disequilibrium between aggregate demand and supply in the economy, which typically focuses on correcting short term imbalances by aiming at a desired BOP outcome, and a desired rate of inflation.
