The Role of Credibility in the Cyclical Properties of Macroeconomic Policies in Emerging Economies
AbstractOptimal stabilization policy is counter-cyclical, aiming at keeping output close to its potential. However it has been traditionally argued that emerging economies are unable to adopt counter-cyclical monetary and fiscal policy. Here we argue that the cyclical properties of macroeconomic policies depend critically on policy credibility. We test this proposition by making use of recent panel data for eleven emerging market economies and time-series data for Chile. The evidence supports that countries with higher credibility, as reflected by lower country risk levels, are able to conduct countercyclical fiscal and monetary policies. Conversely, countries with less credible policies (and, therefore, with higher country risk spreads) contribute to larger cyclical fluctuations by applying pro-cyclical policies. For Chile we find that both monetary and fiscal policies have been largely counter-cyclical after 1993.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 237.
Date of creation: Nov 2003
Date of revision:
Other versions of this item:
- César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2004. "The role of credibility in the cyclical properties of macroeconomic policies in emerging economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 613-633, December.
- NEP-ALL-2003-11-23 (All new papers)
- NEP-FIN-2003-11-23 (Finance)
- NEP-MAC-2003-11-23 (Macroeconomics)
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