IPD AI

A Broad View of Macroeconomic Stability

01/16/2006
Working Paper

This paper recommends a broad concept of macroeconomic stability, whereby “sound macroeconomic frameworks” include not only price stability and sound fiscal policies, but also a well-functioning real economy, sustainable debt ratios and healthy public and private sector balance sheets.

These multiple dimensions imply using multiple policy instruments. The paper elaborates a framework for developing countries that involves active use of countercyclical macroeconomic policies (exchange rate, monetary and fiscal), together with capital management techniques (capital account regulations and prudential rules incorporating macroeconomic dimensions). It also explores the role of international financial institutions in facilitating developing countries’ use of countercyclical macroeconomic policies.