Tight Money, Real Interest Rates, and Inflation in Sub-Saharan Africa

The consequences of tight monetary policy are analyzed in an optimizing currency-substitution model of a small, open economy that operates under an open capital account and a flexible exchange rate. There is a reasonably good fit between the dynamics generated by the model and the stylized facts in the tight-money episodes that occurred in Kenya in 1993 and Nigeria in 1989-91. The study's results shed light on two issues: why tight money has provoked stupendous increases in inflation and the real interest rate in some episodes, and whether tight money is a foolish, unsustainable policy that always worsens the fiscal deficit and raises the inflation rate in the long run. Copyright 2003, International Monetary Fund

Trade Policy In developing Country

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Input Price Shocks in the Small Open Economy.

This paper investigates the short run, macroeconomic effects of an OPEC-type price shock in a two-sector, tradables-nontradables model with a very general treatment of production. General conditions are derived under which the impact effects of the shock will be stag- inflationary and the outcomes, in a variety of special cases, are examined. Surprisingly, it is found that in many cases stag- deflationary Keynesian unemployment is to be expected. Copyright 1986 by Royal Economic Society.

Import Liberalization vs. Export Promotion.

This paper compares the alternative strategies of import liberalization and export promotion in a dynamic general equilibrium model in which underemployment exists and capital accumulation is endogenous. The short- and long-run effects upon aggregate capital accumulation and underemployment are analyzed along with the conditions under which a shift in trade policy generates a welfare improvement viewed over the entire transition path.

Quotas v. Devaluation in the Small Open Economy.

This paper compares the impact on welfare and inflation of a quota that generates the same cumulative payments surplus as a devaluation. If free trade prevails initially, the two policies have indentical welfare effects and give rise to the same path for the aggregate price level. When the implicit tariff is initially positive, however, welfare is lower and the price level higher for all time horizons under a quota. Copyright 1993 by The London School of Economics and Political Science.

Public sector layoffs, severance pay, and inflation in the small open economy

Because severance pay is worth 2-5 years of wages in many LDCs, public sector layoffs increase the fiscal deficit in the short run. Nevertheless, generous severance pay is not as serious a macroeconomic problem as generally thought. In the case where the fiscal deficit is financed by printing money, inflation is continuously lower under plausible conditions. When the government can borrow in world capital markets and layoffs reduce the present-value wage bill, there exists a sequence of bond sales and subsequent redemptions that guarantees continuously lower inflation. This result does not hold, however, if the reform lacks credibility.Severance pay Inflation Fiscal deficit

On the Condition for Export-Led Growth.

In this paper, the author explores the conditions under which favorable export shocks produce export-led growth in a three-sector, three-factor, general equilibrium model that allows for endogenous capital accumulation. The export shock takes the form of either a resource discovery or an increase in the world market price of the export good. While surprisingly simple conditions define the outcome in many cases, there is no general presumption that an export boom will act as an engine of growth; much depends on the precise structural characteristics of the economy.