Stabilizing Poverty In The Context Of The IMF's Monetary Model

The IMF monetary model focuses on the balance of payments. This paper adds a poverty stabilization objective to it. Drawing on statistical income distribution theory, key aspects of the head count poverty indicator are introduced. The resulting model reproduces traditional balance of payments policy prescriptions, while showing their implications for the incidence of poverty. A balance of payments-poverty tradeoff relationship is derived. This facilitates analysis of pre-emptive policies that can stabilize the incidence of poverty when undertaking balance of payments adjustment, thereby reducing the need for costly alleviation. The suggested approach is illustrated in the context of Mexico’s 1995 stabilization episode.