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Institutions and Cyclical Properties of Macroeconomic Policies

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  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

Abstract

Strong swings in business cycle conditions in industrial and emerging market economies (EMEs) alike have renewed the debate on effectiveness of stabilization policies. Traditionally it has been argued that EMEs are unable to pursue counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy equilibriums. However, we claim that EMEs with institutional features similar to those of industrial countries may be able to conduct counter-cyclical policies. Using a sample of 20 EMEs and annual data for the 1990-2003 period, we find that the level of institutional quality plays a key role in the ability of these economies to conduct stabilizing macroeconomic policies. We show that EMEs with strong institutions are able to implement counter-cyclical macroeconomic policies —reflected in extended monetary-policy (Taylor) and fiscal-policy rules.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 285.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:285

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  1. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications 4032, Inter-American Development Bank, Research Department.
  2. Alberto Alesina & Alexander Wagner, 2003. "Choosing (And Reneging On) Exchange Rate Regimes," Harvard Institute of Economic Research Working Papers 2008, Harvard - Institute of Economic Research.
  3. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
  4. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  5. repec:fth:inadeb:326 is not listed on IDEAS
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Cited by:
  1. Balazs Egert, 2012. "Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-Cyclical?," CESifo Working Paper Series 3777, CESifo Group Munich.
  2. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
  3. César Calderón & Klaus Schmidt-Hebbel, 2008. "Business Cycles and Fiscal Policies: the Role of Institutions and financial Markets," Working Papers Central Bank of Chile 481, Central Bank of Chile.
  4. Enisse Kharroubi & Philippe Aghion, 2008. "Cyclical Macro Policy and Industry Growth: The effect of counter-cyclical fiscal policy," 2008 Meeting Papers 837, Society for Economic Dynamics.
  5. Marcelo Ochoa & Klaus Schmidt-Hebbel, 2006. "El Banco Central de Chile en Comparación con los Bancos Centrales del Mundo," Working Papers Central Bank of Chile 367, Central Bank of Chile.

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