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Modeling Stabilization Policy for the LDCs in an International Setting

By Jere R. Behrman


The major concern of both empirical and theoretical macroeconomic analysis of the LDCs has not been the question Of stabilization within the framework of national income determination models. In a recent survey of the state of the art regarding the use of economy-wide models for LDCs, for example, Blitzer et al (1974) do not even include a chapter on macroeconomic income-determination models. The focus, instead, has been on growth, with the analytical framework provided by supply-oriented models characterized by very limited or no substitution possibilities and by binding capital and/or foreign exchange constraints. Such an emphasis reflects two widely held views. 1) Growth is relatively a far more important economic objective (and stabilization less important) in the LDCs than in the DCs. 2) Keynesian income-determination models are inappropriate or of very limited appropriateness for LDCs. 1 Some exceptions to the predominant view have long existed. Often these exceptions, moreover, have included considerable concern about the role of the foreign sector in stabilization. The participants in the "structuralist-monetarist" controversy in Latin America, for example, have accorded a significant role to stabilization policies, with special emphasis on the foreign sector. 2 These exceptions, moreover, have been growing recently. The recognition of the existence of considerable underutilized capacity has increase

Year: 2013
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