DP456 | Policies to Move from Stabilization to Growth

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01/09/1990

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Abstract

The tradition in discussions of stabilization is to assume that fiscal austerity, competitive real exchange rates, sound financial markets and deregulation provide the preconditions for a resumption of growth. There is, however, a need to distinguish the necessary and the sufficient conditions. Adjustment is strictly necessary, but it may not be sufficient. Asset holders can postpone repatriation of capital flight and investors can delay initiating projects, so that there is an important coordination problem that classical economics does not recognize.