Modeling the effects of adjustment programs on income distribution

This paper introduces the general structure of the "micro-macro" economywide simulation model ("maquette") used in several case studies on the impact of adjustment policies on the distribution of income. The description of the maquette emphasizes how the short- and medium-run effects of adjustment packages are incorporated in a general equilibrium model and explains the common structure and variants in the specification and estimation of relationships in product, factor, financial, and foreign exchange markets. Simulations are used to illustrate the role of differences in assumptions about market adjustment mechanisms (e.g., fix-price or flex-price, closed or open financial system) on the effects of adjustment policies on the distribution of income. Adjustment to an external shock through devaluation or through fiscal retrenchment is then contrasted for an economy with different degrees of financial and foreign trade openness. The simulations show that assumptions about macroeconomic closures and behavioral parameters matter a great deal in determining the productive and distributive effects of a shock and a country's adjustment to that shock.