Chapter 2: Monetary and Fiscal Policies for Macroeconomic Stability: An Asian Perspective
This chapter provides an overview of the scope of macroeconomics, introduces key issues in monetary theory and policy, and highlights the roles of monetary and fiscal policies in macroeconomic stability (Friedman, 1948; 1968a; Lucas, 1986).1 The discussion revolves around the theme that the phenomenal economic progress in East and Southeast Asian countries over the past four decades took place within the framework of what may be called the East Asian development paradigm (Ichimura, 1993; James et al., 1987; Ranis, 1987). One characteristic feature of this paradigm is the maintenance of macroeconomic stability within an open economy context. Disciplined monetary and fiscal policies are credited for the low inflationary economic environment in East and Southeast Asia that has kept the real exchange rates closer to equilibrium levels (Bhagwati, 1996; Montiel, 2003; Pfefferman, 1985). Consequently, unlike most countries in Latin America, the East and Southeast Asian countries have avoided the problem of policy-induced exchange rate misalignment2 and associated external crises (Campos, 1969; Corbo, 1988; Dornbusch, 1993; Edwards, 1989a; 1989b; 1998). According to the World Bank (1993), competitive real exchange rates contributed to export-driven growth in high-performing Asian economies. Another characteristic of the East Asian development model is pro-growth institutions that some economists argue have been even more important in explaining macroeconomic performance in developing countries than their exchange rate arrangements (Calvo, 1996; Calvo and Mishkin, 2003). MACROECONOMICS AND POLICY DEBATES Economic growth theory focuses on the determination of the level and the rate of growth of natural (or potential) output that...
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