Money, prices and stabilization policies in some developing countries

Abstract

In this paper we examine the general reasons for price and balance of payments instability in less developed countries (LDCs) and critically evaluate the 'adjustment policies' .usually prescribed by the International Monetary Fund (IMF) for these countries. The scope for stabilization policies is then examined in the framework of the Keynesfan-monetarist controversy. The causality between money and prices is examined by using a transfer function (time-series) approach. A simple model for inflation generation is set up to analyse the price and output effects of the growth of money supply. Some unfavourable effects of a restrictive monetary stabilization policy in LDCs are indicated. The impact of a rise in interest rate on savings in some LDCs are found to be positive, but not always significant

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