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Abstract
Macroeconomic policy in developing countries has received considerable attention in recent years as continuing external and internal imbalances have contributed to a slowdown in growth, balance of payments difficulties, and high inflation. Many countries have undertaken adjustment programs whose announced objectives have been to reduce external imbalances and to lower inflation while avoiding recession and enhancing medium-term growth. The consequences of such programs for income distribution have also received increased attention. Diverse macroeconomic targets such as these respond to policy and other shocks via fairly complex general equilibrium interactions. Thus, the analysis of the effects of policies on such variables, as well as of the trade-offs among conflicting macroeconomic targets confronted by policymakers, must necessarily be conducted by using reasonably detailed quantitative macroeconomic models. Existing quantitative models for developing countries are not well suited for exploring these issues, however, because they typically incorporate ad hoc behavioral relationships and generally provide inadequate treatment of expectations.1 The formation of expectations is generally modeled in a static or adaptive fashion, even though forward-looking expectations have by now become an important feature of macroeconomic analysis for developing countries.2
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