Macroeconomic Shocks and Policies B.

he importance of distributional issues in policymaking creates a need for empirical tools that can help assess the impact of economic shocks and policies on the living standards of relevant individuals. The purpose of this chapter is therefore to review some of the modeling approaches that are currently in use at the World Bank and other international financial institutions in the evaluation of the impact of macroeconomic shocks and policies on poverty and income distribution. The hope is that the interested reader might then be able to make an informed choice among the reviewed approaches.1 Developing countries face a host of macroeconomic challenges in the design and implementation of development strategies and policies. Some of the recurrent issues include (1) fiscal adjustment, (2) monetary policy reforms, (3) trade liberalization, and (4) the impact of terms-of-trade shocks. Fiscal adjustment involves a modification of government tax, spending, and borrowing policies to achieve a sustainable macroeconomic framework consistent with the objectives of economic growth and poverty reduction. Monetary policy reforms entail control of foreign capital flows and adjustments in the money supply and in the exchange rate. Trade liberalization implies a reduction or removal of trade barriers such as quantitative restrictions and tariffs. In fact, trade liberalization ha