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Macroeconomic stabilization in developing economies: Are optimal policies procyclical?

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  • Demirel, Ufuk Devrim

Abstract

Many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies. In particular Kaminsky et al. [2004. When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, MIT Press] demonstrate that a large group of middle-income countries run contractionary policies and experience capital flight during times of recession. This paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics. An optimal fiscal and monetary policy problem is formulated and solved for a small-open economy that faces a country-specific interest rate spread in international financial markets. It is found that, in the presence of the country spread, optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization. Optimal policies and capital flows turn countercyclical in the absence of the country spread. This pattern is robust to a range of alternative model specifications.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 3 (April)
Pages: 409-428

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:3:p:409-428

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Optimal macroeconomic policies Procyclicality Stabilization;

References

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Citations

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Cited by:
  1. Karlygash Kuralbayeva, 2011. "Fiscal Policy Adjustment to Shocks in Commodity-Producing Countries," OxCarre Working Papers 060, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Barnett, William & Eryilmaz, Unal, 2012. "An analytical and numerical search for bifurcations in open economy New Keynesian models," MPRA Paper 40426, University Library of Munich, Germany.
  3. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
  4. Carrasco, Carlos A., 2013. "El Nuevo Consenso Macroeconómico y la mediocridad del crecimiento económico en México
    [New Consensus Macroeconomics and the mediocrity of economic growth in Mexico]
    ," MPRA Paper 53391, University Library of Munich, Germany.
  5. Cheikh Tidiane Ndiaye & Mamadou Abdoulaye Konte, 2012. "Politiques macroéconomiques et stabilisation des chocs dans la zone UEMOA," Working Papers halshs-00830595, HAL.
  6. Kuralbayeva, Karlygash, 2013. "Optimal fiscal policy and different degrees of access to international capital markets," Journal of Development Economics, Elsevier, vol. 103(C), pages 336-352.

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