Growth, Macroeconomics, and Development

Abstract

The 1980s were both the lost decade of growth for much of Latin America and Africa and the period in which-through the new growth theory-macroeconomists returned to the study of growth and development. The new growth theory is production function driven and concerned primarily with steady states, and has paid little attention to the role of macroeconomic policy-as reflected for instance in the rate of inflation and the budget deficit-in determining growth. This paper presents a variety of evidence that macroeconomics policies matter for long-run growth. First, macroeconomic variables enter the typical new growth theory cross-country regressions with statistical significance and the expected signs. Second, evidence from large multicountry case studies, and from case studies of Chile and Côte d'Ivoire presented in the paper, shows that macroeconomic policy choices have had a significant impact on growth over periods of more than a decade. The conclusion is that macroeconomic policy choices, including the budget deficit, the exchange rate system, and those choices that determine the inflation rate, matter for long-term economic growth.

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