The macro content of PRSPs: assessing the need for a more flexible macroeconomic policy framework

Are PRSPS flexible enough to cope with external shocks?

This article analyses the content of 15 Poverty Reduction Strategy Papers from a growth and poverty reduction perspective. It argues that, contrary to new trends in developed and middle-income countries, their policy frameworks lack the necessary flexibility to deal with external shocks and address macroeconomic volatility appropriately. This is because their fiscal and monetary policies are too narrowly focused on fiscal balance and price stability and consequently pay too little attention to economic fluctuations arising from external shocks, which have major effects on poverty and growth. To address these issues, the article proposes a set of policy measures.

Policy recommendations are:

price stability is very important to long-term growth, and therefore should be a key objective of monetary policy. However, once price stability is achieved, supporting growth and employment should also be included among the objectives of monetary policy, as indeed they are in the United States and other developed countries
PRSP countries are correct in pursuing a prudent fiscal policy. This policy stance provides credibility, thereby contributing to macroeconomic stability and long-term growth. However, prudence should be based on realistic fiscal targets, and should not preclude flexibility
flexibility in the fiscal framework should be allowed for, to deal not only with the downturn of the business cycle but also with the effects of external shocks
it is important that the potential conflict among the numerous demands for public expenditure be appropriately addressed

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The macro content of PRSPs: assessing the need for a more flexible macroeconomic policy framework