The Poverty-Macroeconomic Policy Nexus: Some Short-Run Analytics

The literature on macroeconomic policy and poverty is certainly not characterized by its paucity. Indeed, since the advent of the poverty reduction strategy paper (PRSP) process, the poverty assessment of policy changes is de rigueur. Furthermore, there exists voluminous literature on the links between financial sector development (FSD — broadly defined to go beyond financial deepening) and economic growth for industrial and developing countries (Arestis and Demetriades 1997, Levine 1997, Demirgüç-Kunt and Levine 2001, Green and Kirkpatrick 2002, Goodhart 2004 and Wachtel 2004, among others, provide comprehensive assessments of the above literature). Although the empirical literature on the finance-growth nexus remains inconclusive overall regarding the impact of FSD on growth, a causal link between the two variables is well established (see Green et al. 2005 and Mavrotas and Son 2006 for a discussion). However, a small, though growing, part of the above literature has focused on the impact of FSD on poverty-reducing growth, which is of crucial importance, inter alia, for the attainment of the Millennium Development Goals (MDGs) (Green et al. 2005, Mavrotas 2005); of relevance to this is the role of financial development in countries emerging from conflict (Addison et al. 2002).