Stabilization and Economic Growth in Developing Countries (Invited Lecture)

Mohsin S. Khan


The need for stabilization typically arises when a country
experiences an imbalance between domestic aggregate demand and aggregate
supply, which is reflected in a worsening of its external payments
position and an increase in the rate of inflation. To combat these twin
problems, policies are required that restrain domestic demand and, at
the same time, expand the production of tradeable goods, thereby easing
the balance of payments constraint. Policies to influence the aggregate
level or rate of growth of domestic demand and absorption, generally
labelled as "demand side policies", include the whole range of monetary
and fiscal measures, while the shifting of resources towards the
production of tradeables involves altering the country's real exchange
rate through devaluation. In general, monetary and fiscal policies and
exchange rate action are considered an integral, if not an indispensable
component of any stabilization programme.

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