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J. J. Polak

formally correct; as a recent Fund description of FM explains, “real income is treated as though it were exogenous” ( International Monetary Fund (1987 , p. 13)). But the absence of an equation does not mean that FM treats output as a loose end for which one can plug in just any number, such as the outcome of the RMSM equations. For, as the same Fund paper continues, “in the actual formulation of Fund-supported adjustment programs, the implications of policies for both output and the price level are carefully analyzed and, of course, output and inflation targets are

International Monetary Fund. Research Dept.
This paper examines factors affecting saving, policy tools, and tax reform. The literature on factors affecting saving and capital formation in industrialized countries is reviewed, and measurement problems are examined. The effect on the saving rate of real rates of return, income redistribution, allocation of saving between corporations and individuals, growth of public and private pension plans, tax incentives, the bequest motive, energy prices, and inflation is considered. The limited tools available to policymakers to affect savings are discussed.
Mr. Mohsin S. Khan and Mr. Peter J Montiel

output as a loose end for which one can plug in just any number, such as the outcome of RMSM equations” (see p. 184, this issue). This is certainly true, but for the specific analytical purpose described above, the RMSM closure is the only one of interest. Alternative mechanisms are not, however, very hard to come up with, and we shall describe one such below. First, though, we deal with a number of specific points made by Polak. Basically, we will show that most of Polak’s comments stem from a confusion between comparative-static exercises designed to show the