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Abstract
Shocks emanating from domestic policies or from changes in the external economic environment in developing countries invariably set off a dynamic process of adjustment that frequently takes some time to work itself out. Although analysis of the macroeconomic effects of such shocks typically focuses on impact effects or on the eventual steady state at which the economy settles, it is the intermediate run—that is, the “real-time” effect of such shocks—that is often of equal if not even greater concern to policymakers in developing countries. While explicit dynamic solutions to small analytical models can yield valuable insights into particular aspects of the economy’s response to such shocks, general-equilibrium interactions can only be studied in the context of larger models that, unfortunately, do not often prove to be analytically tractable. Thus, numerical simulation experiments with dynamic macroeconomic models become the tool of choice for understanding the real-time effects of policy measures and external shocks in developing countries.
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