Macroeconomics and money in developing countries: an econometric model for an Asian region

This thesis is a contribution towards the macroeconomic and monetary analysis of developing countries. A fully-fledged macroeconometric model is theoretically specified, econometrically estimated and dynamically simulated for policy analysis. The model contains demand side, supply side, balance of payments accounts, government accounts and a financial sector. The model is tested using regional data consisting of seven Asian Developing Countries, namely, Fiji, India, Malayasia, Pakistan, Philippines, Sri Lanka, and Thailand. A regional econometric model for Asian LDCs was lacking in the realm of global econometric models and this study is an attempt to bridge this gap by building a first ever model for this region.In the demand side of the model volume equations for consumption, investment, exports and imports and an equation for export prices are estimated. The supply side is derived from wage and price equations following a production function approach which is neo-classical in spirit. Inflation is modelled as a function of the divergence between demand and supply. Government accounts and the balance of payments accounts are fully specified.Most of the existing macroeconomic models in LDCs context abstract from modelling a financial sector. The implicit reason for this is that the financial sector in these economies is underdeveloped; therefore, little scope exists for monetary policy instruments. We have developed a detailed bank based financial sector model where all the balance sheet flows of the Central Bank and commercial banks are at the centre stage. We show that monetary policy instruments are effective in affecting macro activity. The interlinkage between the financial and the real sector comes not through the cost of capital, rather it arises due to income-expenditure flows and the real financial asset stocks. Such linkages operate even if the financial sector is undeveloped.