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Macroeconomic volatility has considerable impacts on growth and inclusiveness. The absence of inclusiveness, in turn, can both be a source of macroeconomic volatility and amplify the macroeconomic effects of shocks. Evidence suggests, for example, that there is a positive relationship between macroeconomic volatility and inequality. The conventional wisdom prevailing before the Global Financial Crisis (GFC) of 2008–2009 considered macroeconomic volatility, driven primarily by productivity shocks, as an important driver of inequality. However, causation can also run in the opposite direction; namely, high and rising inequality or lack of inclusiveness could be the cause of macroeconomic volatility and economic crises.


Not surprisingly, a new literature in macroeconomics has emerged since the GFC that tackles these complex interactions in novel ways. This literature goes beyond the traditional representative agent models of macroeconomics by explicitly incorporating income and wealth heterogeneity among households. It shows analytically that macroeconomic aggregates and national well-being depend on income and wealth distribution in non-trivial ways. These new models often deliver strikingly different implications for macroeconomic policies and economic fluctuations and, conversely, allow a serious study of the distributional implications of macro policies.


In a similar vein, and from a policy point of view, distributional and inclusive growth implications of macroeconomic policies have been incorporated increasingly in the design and implementation of IMF-supported adjustment programs as well as in the annual consultations of the IMF staff with the IMF’s 190 member countries. This understanding has gone beyond traditional macroeconomic policies to include structural reforms that support inclusiveness in many areas, including Covid-related financial assistance in excess of $100 billion that was awarded by the IMF to more than 80 countries in 2020.


In this chapter, we analyze the dynamic relationship between macroeconomic volatility and inclusiveness. First, we look at the impact of economic fluctuations on several measures of inclusiveness, focusing separately on advanced and developing economies. Then, we study the effects of inequality on macroeconomic volatility. In both sections, we separately look at the effects of economic crises—an extreme case of economic volatility—on inclusiveness and vice versa. Finally, we shift the discussion to an analysis of the role of fiscal, monetary, macroprudential, and exchange rate policies in supporting inclusiveness.

The Addis Ababa Action Agenda recognizes that public policies, regulatory gaps and misaligned incentives pose risks, including to financing sustainable development, and that there are spillover risks to developing countries.

In the Addis Agenda, Governments specifically:

  • Commit to pursue sound macroeconomic policies that contribute to global stability, equitable and sustainable growth and sustainable development, while strengthening our financial systems and economic institutions; and to strengthen international coordination and policy coherence to enhance global financial and macroeconomic stability

  • Commit to work to prevent and reduce the risk and impact of financial crises, acknowledging that national policy decisions can have systemic and far-ranging effects well beyond national borders, including on developing countries

  • Call on international financial institutions to further improve early warning of macroeconomic and financial risks


  • Recognize the importance of strengthening the permanent international financial safety net


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Maintaining macroeconomic stability is critical for sustained and inclusive development.

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To reduce inequalities, policies should be universal in principle, paying attention to the needs of disadvantaged and marginalized populations.

  • Encourage increased dialogue among regional financial arrangements and strengthened cooperation between IMF and regional financial arrangements

  • Urge the IMF to continue efforts to provide more comprehensive and flexible financial responses to the needs of developing countries

  • Call on International financial institutions to support developing countries in developing new instruments for financial risk management and capacity building

  • Request international financial institutions to provide support to developing countries pursuing sustainable development to assist them in managing any associated pressures on the national balance of payments

  • Look forward to the special drawing rights review


Solutions can be found, including through strengthening public policies, regulatory frameworks and finance at all levels, unlocking the transformative potential of people and the private sector, and incentivizing changes in financing as well as consumption and production patterns to support sustainable development. We recognize that appropriate incentives, strengthening national and international policy environments and regulatory frame- works and their coherence, harnessing the potential of science, technology and innovation, closing technology gaps and scaling up capacity-building at all levels are essential for the shift towards sustainable development and poverty eradication.


The Agenda reaffirms the importance of freedom, human rights, and national sovereignty, good governance, rule of law, peace and security,
combating corruption at all levels and in all its forms, and effective, accountable and inclusive democratic institutions at the sub-national, national and international levels as central to enabling the effective, efficient and transparent mobilization and use of resources.

Cohesive nationally owned sustainable development strategies, supported by integrated national financing frameworks, will be at the heart of our efforts. We reiterate that each country has primary responsibility for its own economic and social
development and that the role of national policies and development strategies cannot be overemphasized. We will respect each country’s policy space and leadership to implement policies for poverty eradication and sustainable development, while remaining consistent with relevant international rules and commitments.


At the same time, national development efforts need to be supported by an enabling international economic environment, including coherent and mutually supporting world trade, monetary and financial systems, and strengthened and enhanced global economic governance. Processes to develop and facilitate the availability of appropriate knowledge and technologies globally, as well as capacity-building, are also critical.


Many countries have adopted flexible exchange rate regimes that broadly follow the “textbook” prescription to allow exchange rates to adjust freely in response to capital flow swings. That frees monetary policy to focus on domestic cyclical conditions in the spirit of a “one target – one instrument” approach. However, large swings in the exchange rate can be disruptive to the real economy as they change domestic prices of exports and imports relative to non-traded goods and services. It can also raise the cost of external debt servicing relative to domestic revenues, sometimes precipitating a debt crisis. Many countries thus deviate from the textbook framework in a variety of ways. Central bank intervention in foreign exchange markets to influence exchange rates is fairly prevalent, particularly among emerging market economies, and particularly in response to persistent capital inflows.


At a time of high uncertainty and rising downside global risks, it is critical that Member States take action to strengthen the permanent global financial safety net (GFSN). Member States have called for a strong, quota-based, and adequately resourced IMF at the centre of the GFSN. Taking account of the challenges posed by higher interconnectivity and uncertainty in the global economy, all layers of the GFSN—countries’ own international reserve buffers, bilateral swap arrangements (BSAs), regional financing arrangements (RFAs) and the IMF—have expanded substantially since the 2008 global financial crisis. Nevertheless, gaps in the GFSN remain, including the need to strengthen collaboration between the IMF and RFAs and the availability of appropriate financing instruments. The IMF Executive Board has also noted “many countries do not have reliable access to BSAs or RFAs”.


Maintaining macroeconomic stability is critical for sustained and inclusive development. Large swings in economic activity, high inflation, deteriorating fiscal positions, unsustainable debt levels and volatile exchange rates are detrimental to the living standards of the most vulnerable. They also endanger progress towards achieving the Sustainable Development Goals.

Managing public spending in a manner that does not weaken macroeconomic stability is a challenge, especially in capacity constrained countries with weak institutions. Politicians typically face stronger incentives to increase spending as opposed to reducing it, but this can lead to unsustainable debt burdens when adequate domestic revenues cannot be raised. In these situations, spending more on debt servicing means spending less on education, health or critical infrastructure.


To avoid debt distress in developing countries, the debt situation needs to be better monitored and more effective early-warning systems and feedback mechanisms developed. There is also an urgent need to control government expenditure, foster efficient use of existing resources to limit recourse to additional debt, and strengthen countries’ capability to manage their public debt.

Key aims:

  • Supporting policy-makers in prioritizing and improving the composition of their spending on quality investments and poverty reduction.

  • Examining how countries can borrow to finance their national development plans while avoiding unsustainable debt burdens.

  • Supporting national governments to strengthen institutions critical for improving the monitoring, accountability, and transparency of spending, as well as for building resilience to shocks.

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