DP406 Growth Oriented Adjustment Programs: A Reconsideration
This paper responds to the important pedagogical exercise of Khan and Montiel (1989). Those authors integrate the Polak monetary model of macroeconomic adjustment with a two-gap growth model to study `adjustment with growth'. Here we nest both the Polak and the Khan and Montiel models in a very conventional macro-model. We first study the effects of a negative external shock and argue that adjustment with growth would not be achieved from adjustment policies on either the Polak or the Khan and Montiel models. We conclude that in the design of growth-oriented based adjustment programmes, attention should be paid to supply-side features not present in the Khan and Montiel model, and suggest that such programmes require a wider range of measures than appears necessary from that model.
