This study is intended to throw new light on the relationship between credit policy and output and other key macroeconomic aggregates in developing countries. A simple macroeconomic framework reflecting both demand and supply-side considerations is developed. Within this framework, empirical evidence is presented to evaluate performance under stabilization programs supported by the International Monetary Fund in 1977, 1978, and 1979. By and large, the stand-by programs were successful with respect to the balance of payments: credit expansion was reduced markedly and the balance of payments improved significantly. At the same time, inflation was generally kept down. These results, it appears, were generally achieved at the cost of a relatively modest reduction in the average growth of output during and immediately after the program period. However, unlike the deceleration of credit and the improvement of the balance of payments, which are found to be statistically significant in a comparison with a reference group, the decline in the average growth rate is not significant in a statistical sense when compared with growth in the reference group. It should be kept in mind that most of the programs under review were accompanied by devaluation, microeconomic supply-side measures, or increased foreign borrowing, which tend to counteract the direct negative effect of contractionary credit policy.
The main conclusion of the study is that the experience with these stabilization programs does not give occasion for grave concern about the short-term contractionary or even stagflationary consequences of adjustment programs supported by the IMF.
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