Macroeconomic Stabilization and Economic Growth: Analysis of Reform Policies in Tanzania
Posted: 9 May 2005
We develop a model for the analysis of macroeconomic management that are caused by failures in the private banking system. Our analysis is applied to Tanzania, a country that faces significant difficulties from a banking system that holds large quantities of non-performing assets. We have constructed a dynamic general equilibrium model that is solved numerically. As initial examples, we have first simulated the model, using historical exogenous parameters, and have compared endogenous macro outputs with corresponding historical outcomes. Assuming all exogenous parameters remain constant for 8 years of the simulation, the banking system begins to become insolvent by the final year. We then impose a program that attempts to increase the productivity, and hence solvency, of the private sector by increasing government expenditures on infrastructure, which are, in turn, financed by foreign capital flows. This experiment leads to a small improvement in real income, but does nothing to enhance the solvency of the banking system. Finally, we impose an improvement in the efficiency of public utilities. This change appears to offer an avenue for improving the solvency of the banking system, the goal of our study.
Keywords: Macroeconomic stabilization; Economic growth, Reform policies
JEL Classification: C68, 023
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