(IMF Model)

No consensus on the appropriate analytical

framework for developing countries
Individual models suitable often conflicting
Differ greatly with regard to countries,
periods, specifications of equations, and
methodology
Generalization across countries are
impossible to make

Generate representative developing

country estimates using:
Uniform data set for relatively large group
of countries
Construct behavioural relationship in the
model.
Using a pooled sample of time series data
The model is of the Mundel-Fleming variety

 Consumption

Interestingly, r is negative and significant

(10% level). Most studies found insignificant
(because inappropriate proxies)
The coefficient, however, is quite small.
The coeff of lagged C is close to unity and
significant (Permanent Income Hypothesis)
The coefficient of disposable income is
significant and positive

Investment
The coeff. of interest rate is negative
although small
Growth in income also affects investment
positively (flexible-accelerator family of
investment theories)
Lagged investment close to but less than
unity= stable investment function as well as
fairly protracted period of adjustment

The per capita stock of capital affects

current output significantly and positively

Provided the least satisfactory

Coefficient of lagged dependent variable is

implausibly high, requiring further
investigation

Export
A significant export response to relative price
changes (but smaller in magnitudes) = inelastic
response (delayed over time)
Foreign income is positive and significant (also
small)
Lagged exports= a fair amount of persistence

Import
Imports are responsive to real exchange rate
Growth in domestic economy increases import
The lagged of reserve-import ratio is positive
and significant

Trade equations are not as responsive to real

exchange rate change and income growth

Interest rate = negative, and income =

positive. (inelastic)

Long run = much higher effect