Modelling the potency of stabilization policy for the Solomon Islands 1978:1Q-1992:4Q

Abstract

A feasible modelling approach to stabilization policy analysis for the Solomon Islands economy is proposed and implemented. A small macroeconomic model is developed to encompass the macro targets of real growth, inflationand balance of payments, and to relate economic performance to stabilization policies. The estimation and testing results for 1978:1Q to 1992:4Q confirm that the model is capable of quantifying the potency of policy instruments and the effects of external shocks on macroeconomic outcomes. By applying deterministic and stochastic simulation techniques to conduct policy sensitivity experiments, it is found to be feasible to relate macroeconomic scenarios to given policy packages in a 'what-if' spirit. Among the findings of interest are that a money-financed increase in government spending yields expansionary but non-inflationary effects, and an interest rate policy reform is a potentially plausible policy option. It is concluded that this modelling approach is feasible for policy analysis for the Solomon Islands economy.