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The Role of Credibility in the Cyclical Properties of Macroeconomic Policies in Emerging Economies

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  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

Abstract

Optimal 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 Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 237.

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Date of creation: Nov 2003
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Handle: RePEc:chb:bcchwp:237

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  1. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
  2. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1999. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 103-134 National Bureau of Economic Research, Inc.
  3. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  5. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  6. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  7. Torsten Persson, 2002. "Do Political Institutions Shape Economic Policy?," Econometrica, Econometric Society, vol. 70(3), pages 883-905, May.
  8. César Calderón & Klaus Schmidt-Hebbel, 2003. "Macroeconomic Policies and Performance in Latin America," Working Papers Central Bank of Chile 217, Central Bank of Chile.
  9. Enrique Mendoza, 2002. "Why Should Emerging Economies Give Up National Currencies? A Case for Institutions Substitution," Research Department Publications 4309, Inter-American Development Bank, Research Department.
  10. John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory 95-07, Federal Reserve Bank of San Francisco.
  11. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  14. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
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Citations

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Cited by:
  1. Yossi Yakhin, 2008. "Financial Integration And Cyclicality Of Monetary Policy In Small Open Economies," Working Papers 0811, Ben-Gurion University of the Negev, Department of Economics.
  2. Central Bank of Chile Working Group for the 11th APEC Finance Ministers’ Meeting, 2004. "Institution Building in a World of Free and Volatile Capital Flows: A Case Study of Chile," Economic Policy Papers Central Bank of Chile 12, Central Bank of Chile.
  3. Josifidis, Kosta & Allegret, Jean-Pierre & Gimet, Céline & Pucar, Emilija Beker, 2014. "Macroeconomic policy responses to financial crises in emerging European economies," Economic Modelling, Elsevier, vol. 36(C), pages 577-591.
  4. Pablo Gonzalez & Mauricio Tejada, 2006. "No Linealidades en la Regla de Política Monetaria del Banco Central de Chile: Una Evidencia Empírica," ILADES-Georgetown University Working Papers inv173, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  5. Klaus Schmidt-Hebbel, 2010. "Macroeconomic Regimes, Policies, and Outcomes in the World," Documentos de Trabajo 386, Instituto de Economia. Pontificia Universidad Católica de Chile..
  6. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
  7. Erdal Atukeren, 2006. "Politico-Economic Determinants of the Crowding-in Effects of Public Investments in Developing Countries," KOF Working papers 06-126, KOF Swiss Economic Institute, ETH Zurich.
  8. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: The Case of Chile," Working Papers Central Bank of Chile 312, Central Bank of Chile.
  9. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel., 2010. "Institutions and Cyclical Properties of Macroeconomic Policies in the Global Economy," Documentos de Trabajo 372, Instituto de Economia. Pontificia Universidad Católica de Chile..
  10. Gabriel Barros Tavares Peixoto & Gabriel Caldas Montes, 2014. "Risk-Taking Channel, Bank Lendingchannel And The “Paradox Of Credibility”: Empirical Evidence For Brazil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 030, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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