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Macro Research for Development: An IMF-DFID Collaboration

Topic 4. Macroeconomic Policies and Income Distribution

Last Updated: August 05, 2013

The analysis of the distributional impact of macroeconomic policy choices has been a goal of policy-makers for decades.

Most poverty and social impact analysis (PSIA) has relied on computable general equilibrium (CGE) models with tens or hundreds of sectors. These models can be carefully calibrated to survey data and can yield detailed distributional impact assessments of changes in taxes, tariffs, or subsidies. The approach is generally one of 'comparative statics'—looking at the long-term effects of a one-time change—and abstracts from dynamic issues in its assessments.

For macroeconomic policy analysis, issues of dynamics are central. Budget deficits are reduced or interest rates increased for dynamic and intertemporal reasons. These include preserving debt sustainability, anchoring inflation expectations, and crowding-in private investment.

Some PSIA has been done with models that have some elements of dynamics and also a highly detailed sectoral breakdown. However, even these augmented models tend to have dynamic and expectations frameworks that are too simple for debt sustainability, fiscal, and monetary policy analysis. These models are at the same time extremely complex, and thus not readily used by macroeconomic policymakers or IMF staff.

The ultimate objective of research on this topic is to allow policymakers to address standard policy questions (e.g. the effects of public investment scaling up, the size of the government expenditure multiplier, or the implications of commodity price booms and busts) using tools that are both broadly in use or under development at the Fund and also sufficiently rich in sectoral structure to allow interesting and useful distributional analyses. More ambitiously, we envisage incorporating elements of structural change (e.g. from agriculture to industry and services) to be able to gauge the linkages between policies, distribution, and longer-term growth.