Institutions and Cyclical Properties of Macroeconomic Policies in the Global Economy
AbstractSharp fluctuations in cyclical conditions observed in industrial and developing countries alike have renewed the debate on the scope and the effectiveness of stabilization policies. Traditionally it has been argued that developing countries are unable to adopt counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. We claim that developing countries with institutional features similar to those of industrial countries are able to conduct counter-cyclical policies. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countriesÂ’ ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected in extended monetary policy and fiscal policy rules. The threshold level of institutional quality at which macroeconomic policy is neutral to the business cycle is higher for fiscal policy than for monetary policy. The sensitivity of fiscal policy cyclicality to institutional quality is larger than is the case of monetary policy.
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Bibliographic InfoPaper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 372.
Date of creation: 2010
Date of revision:
Counter-cyclical macroeconomic policies; institutions; fiscal policy; monetary policy;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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