Thursday, August 20, 2009

A demand-determined economy

A country-specific policy package that recognises economies to be demand-determined would have the following components: (i) an expan fiscal budget, consistent with the rule that the overall deficit not exceed public investment; (ii) an accommodating monetary policy that tolerates moderate inflation in order to achieve higher growth by providing subsidised credit for poverty reduction programmes (the target could be that the real interest rate equals the sustainable growth rate of per capita income—the Golden Rule); and (iii) a managed exchange rate regime that seeks to promote exports and alter the relative price of tradeables and nontradeables without causing unmanageable inflation spirals.

That's from Degol Hailu and John Weeks on IPC's One Page#92. The point is that low income countries can implement counter-cyclical economic policies if they adopt a demand-determined economy framework instead of price-determined economy framework.