Macroeconomic policies and adjustment in Yugoslavia: some counterfactual simulations

Abstract

After a period of successful growth in the 1970s, Yugoslavia was hit very hard by a severe balance of payments crisis at the end of the 1970s that has overshadowed the economic scene since. What were the causes of the crisis? Could it have been averted through the adoption of alternative policies in the 1970s? What can be said about the adjustment policies pursued since 1980 in the light of the lessons of the 1970s? These questions are addressed in this paper with the help of some counterfactual policy simulations for the period 1973-79, using a macroeconomic model developed for the Yugoslav economy. The simulations yielded three main conclusions. First, the payments crisis was attributable to a deterioration in the policy environment, particularly with respect to the exchange rate, wages, and interest rates, although external shocks and/or excessive expansion of domestic demand have played an aggravating role. Second, the crisis could have been avoided with alternative macroeconomic policies. Third, Yugoslavia could have achieved external balance and satisfactory growth in investment and output since 1980 had the policy environment been reformed promptly and significantly.