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Title: Macroeconomic Policies in the OECD and LDC External Adjustment

Author(s): Warwick McKibbin and Jeffrey Sachs

Publication Date: March 1985

Keyword(s): Budget Constraint, Forward-Looking Markets, LDC Adjustment, OECD Policies and Policy Coordination

Programme Area(s): International Macroeconomics

Abstract: In this paper, the authors describe a simulation model for analyzing the effects of macroeconomic policies in the OECD on global macroeconomic equilibrium. Particular attention is paid to the effects on developing countries of alternative mixes of monetary and fiscal policies in the OECD. Though the model is quite small, it has several properties which make it attractive for policy analysis. First, the important stock-flow relationships and intertemporal budget constraints are carefully observed, so that the model is useful for short-run and long-run analysis. Budget deficits, for example, cumulate into a stock of public debt which must be serviced while current account deficits cumulate into a stock of foreign debt. Second, the asset markets are forward-looking, so that the exchange rate is conditioned by the entire future path of policies rather than by a set of short-run expectations. Third, the model is amenable to policy optimization exercises, and in particular can be used to study the effects of policy coordination versus non-coordination in the OECD, on global macroeconomic equilibrium.

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Bibliographic Reference

McKibbin, W and Sachs, J. 1985. 'Macroeconomic Policies in the OECD and LDC External Adjustment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=56