A Broad View of Macroeconomic Stability

Abstract

This broad view of macroeconomic stability should lead to the recognition of the role played by two sets of policy packages, whose relative importance will vary depending on the structural characteristics, the macroeconomic policy tradition and the institutional capacity of each country. The first involves a mix of countercyclical fiscal and monetary policies with appropriate (and, as we will argue, generally intermediate) exchange rate regimes. The second includes a set of capital management techniques aimed at guaranteeing healthy private and public-sector balance sheets. To facilitate economic growth, such interventions through the business cycle should aim at developing sound fiscal systems that provide the necessary resources for the public sector to do its job, a competitive exchange rate and moderate long-term real interest rates. These conditions, together with deep financial markets that provide suitably priced investment finance in domestic currency with sufficiently long maturities, are the best contribution that macroeconomics can make to growth. The paper is divided in five sections, the first of which is this introduction. The second tries to derive some "stylized facts" about financial and real macroeconomic instability in developing countries. The following two analyze the two policy packages mentioned in the previous paragraph. In lieu of conclusions, the last takes a brief look at the implications of this framework for international cooperation