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Mohsin S. Khan, Saleh M. Nsouli, and Mr. Chorng-Huey Wong

Abstract

Since its establishment in 1964, the IMF Institute has trained more than 13,000 officials from 183 member countries in Washington and over 8,000 officials overseas. The training focuses on such subjects as financial programming and policies, monetary and exchange operations, public finance, financial sector issues, and macroeconomic statistics. This book includes some of the background material that the IMF Institute uses in the training of country officials. Although IMF Institute courses also cover structural issues—such as banking system, public enterprises, and labor market reform (which are also critical to the achievement of economic policy objectives), this book deals only with macroeconomic issues. Specifically, it addresses some of the key questions policymakers face in managing national economies:

A S and J F

Abstract

Australia’s economic performance has been impressive in recent years. Growth has been healthy, with real output climbing by more than 25 percent between the 1991 cyclical trough and the end of 1997. Moreover, in contrast with previous cycles, this growth has been evenly paced; “boom-and-bust” experiences have been avoided, and the expansion has been well balanced on both the demand and supply sides. Another striking aspect of this recovery has been the low rate of inflation. Since 1991, underlying inflation has averaged just 2¼ percent, and has never exceeded 3⅓ percent. Thus, with respect to both growth and inflation, Australia has compared very favorably with other Organization for Economic Cooperation and Development (OECD) countries in the 1990s.

Graciana del Castillo

Abstract

Traditional models of exchange rate determination have focused on three types of explanatory variables: national price levels, interest rates, and the balance of payments. Although the perception that exchange rates are related to national price levels had existed for a long time, it was with Cassel’s introduction of the term purchasing power parity (PPP) in 1918 that exchange rates became closely associated with the comparative purchasing powers of national currencies. Policymakers were also aware that the behavior of exchange rates could be influenced by adjustments in interest rates: when interest rates rise, the exchange rate—the price of foreign currency in terms of domestic currency—falls, indicating an appreciation, or strengthening, of the domestic currency. The relationship between the interest rate and the exchange rate—known as the interest rate parity hypothesis—was bolstered as forward exchange markets developed. The recognition that exchange rates adjust to international payments established a relationship between the exchange rate and the balance of payments. With the Keynesian revolution and the rapid expansion of international capital transactions related to international trade, however, the behavioral links between the balance of payments and the exchange rate were reexamined and embedded in models that took into account the interplay of external and internal pressures on exchange rates.

Peter J. Montiel

Abstract

A central focus of the macroeconomic policy advice that developing and transition economies have received over the past decade has been the importance of “getting prices right.” For transition economies this advice has an important microeconomic dimension. The decentralization that characterizes market economies implies that decisions about what and how much to produce, as well as about what and how much to consume, are made by individual economic agents, and relative prices are the signals and incentives that guide the decisions of these agents. In doing so, relative prices play a key role in allocating economic resources among competing uses. For both types of economies, however, the need to get prices right also has a key macroeconomic dimension. The two central macroeconomic relative prices are the price of goods in the present relative to the price of goods in the future (the real interest rate) and the price of domestic goods relative to the price of foreign goods (the real exchange rate).

Mr. Chorng-Huey Wong

Abstract

This chapter provides a framework for determining the appropriate mix of monetary, fiscal, and exchange rate policies for correcting macroeconomic imbalances. It discusses the design of macroeconomic adjustment programs and the appropriate actions required of policy agencies facing imperfect coordination.

C T

Abstract

For much of the postwar era, Australia’s economic performance has been relatively disappointing. From the 1960s through the 1980s, per capita growth rates were significantly lower than those of other industrial countries, causing Australia’s income rank to slip steadily from one of the highest in the OECD to merely average levels.1 Based on GDP levels per capita, measured in purchasing power exchange rates, Australia was the third-richest country in the OECD in 1960, after the United States and Switzerland, and its per capita income level was more than 50 percent higher than that of the European OECD average. But, because of its persistently lower growth performance, Australia fell to fifteenth place within the OECD in 1992, surpassed by most industrial countries in Europe. At the same time, unemployment gradually increased, from low levels in the 1960s to OECD average levels in the 1980s.