Macroeconomic Stability and Inclusive Growth

IMF Working Papers, March 19, 2021

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We survey the literature on the relationship between macroeconomic stability and inclusive growth and identify gaps in our knowledge.
We examine the role of macroeconomic policies (fiscal, monetary, macroprudential, and exchange rate) and measures of inclusiveness (income inequality, consumption inequality, wealth inequality, poverty, and unemployment) across countries at different income levels.
Avoiding procyclical macroeconomic policies and mitigating macroeconomic volatility should be on the agenda of all policymakers concerned with promoting inclusive growth.
The emerging theory and evidence suggest a strong role for macroeconomic policies in shaping inclusive growth, both in the short-run and the long-run.
The two-way relationship between the macroeconomy and inequality underscores the challenge of identifying and estimating causal relationships.
Models with heterogeneous agents have much to offer in this area.

Macroeconomic policies influence inclusive growth across multiple dimensions: income inequality, consumption inequality, wealth inequality, poverty, and unemployment.
Both short-run and long-run channels link macroeconomic stability to inclusive growth.
Procyclical macroeconomic policies exacerbate volatility and can undermine inclusive growth.
The bidirectional relationship between inequality and macroeconomic outcomes complicates causal identification.

Prioritize avoiding procyclical macroeconomic policies.
Mitigate macroeconomic volatility as a central objective for policymakers aiming to promote inclusive growth.
Incorporate heterogeneous-agents models to better capture distributional effects and to improve identification of causal pathways between macroeconomic policy and inequality.

Important gaps remain in understanding causality between macroeconomic variables and measures of inclusiveness.
Further development and application of models with heterogeneous agents are recommended to address distributional impacts and two-way relationships between the macroeconomy and inequality.

IMF Working Paper by Hamid R Davoodi, Peter J Montiel, and Anna Ter-Martirosyan, March 19, 2021.