CEPA Center for Economic Policy Analysis Modelling Macroeconomic and Distributional Impacts of Stabilization and Adjustment Packages: Current Literature and Challenges

Structural adjustment policy packages sponsored by the IMF and the World Bank are a combination of monetary, fiscal and trade measures intended to curb inflation, improve the balance of payments, and foster economic growth. From a brief discussion of a typical structural adjustment policy package and the debate about its macroeconomic and distributional impacts, we derive a list of desirable characteristics for an adequate model thereof. Upon reviewing the literature on the issue, we see beginnings of a consensus on how to construct the sectoral structure of the real side of the economy and the formation of relative prices, and effective tools for analyzing distributional impacts also on population groups different from those used in formulating the model. However, the views on the proper relationship (in particular, directions of causality) between credit, prices, and real output are sharply divided between the monetarist and the structuralist school, with only one model allowing for an endogenous switch between the two corresponding modes of behavior. We also find that current methodologies are not very useful for representing the behavior of the economy prior to the achievement of the hypothetical equilibrium, thus not allowing for calibration of model behavior to time series and potentially resulting in low quality of parameter estimation. Furthermore, currently used formalisms for representation of stock-flow relationships involving capital account transactions are quite unwieldy, requiring the model builder to manually keep track of accounting identities and thus unnecessarily increasing the effort of model building.