Macroeconomic Performance and Adjustment under Policies Commonly Supported by the International Monetary Fund

Abstract

The fundamental objective of any adjustment program, whether supported by the International Monetary Fund (IMF) or otherwise, is to eliminate disequilibrium between aggregate demand and supply, which is typically reflected in balance-of-payments deficits and rising prices. In the past the IMF stabilization programs were basically demand side. The focus on the demand management is based on the absorption and, especially, the monetary approach to the balance of payments. In recent years, however, the IMF has recognized the importance of supply factors, and thus adjustment programs include policy tools that deal with production bottlenecks, ways to improve resource utilization, and so forth. This shift in policy does not, however, imply that the IMF attaches less significance to demand than supply factors. In his recent paper Mohsen Khan states that although supply shocks can cause disequilibrium between aggregate demand and supply, often such imbalances can be traced to inappropriate policies that expand aggregate demand too rapidly relative to the growth of the productive capacity in the economy.' The purpose of this article is to examine directly the effects that a typical stabilization program may have on three important macroeconomic variables: the growth rate in real output (economic growth), the inflation rate, and the current account balance. To provide some empirical foundation for the analysis, the effects of such programs are illustrated through regression analysis. Three models that examine the relationship between relevant macroeconomic variables and the IMF's instrumental tools are introduced. The analysis covers 43 countries, of which 27 are program countries that used IMF financial resources during 1977. The period under study is 1977-83. During 1976-77, the