Macroeconomic Policy Choices

What options do the economic authorities in developing economies have for policy formation, at the macro and sectoral levels? Limits on policy maneuverability vary greatly across economies. In this chapter, we try to sort out the possibilities regarding macroeconomic regulation and then take up growth and sectoral policy in Chapter 8. We start by looking at how private and government net borrowing flows and current account balances interact in the short to medium run. Some algebraic back-up is provided in Appendix 7.1, which deals with gap models, relationships between flow and stock variables, and theories of the exchange rate. Macroeconomic policy packages appropriate to combinations of financial stages and binding gaps are reviewed. The discussion then turns to capital management techniques, including controlling international flows and regulating domestic financial markets, and central issues of financial development. The chapter closes with considerations regardin