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Counter-cyclical Economic Policy

Author

Listed:
  • Douglas Sutherland

    (OECD)

  • Peter Hoeller

    (OECD)

  • Balázs Égert

    (OECD)

  • Oliver Röhn

    (OECD)

Abstract

What changes are needed to make counter-cyclical economic policy more effective in the aftermath of the recent crisis? An important lesson from the severity of the recent recession is that policy in various areas will have to be more prudent during upswings and to build in greater safety margins to be able to react to large adverse shocks. In the period leading up to the crisis, cycles became more synchronised, while asset prices became more volatile. Recent events also underline the difficulties encountered in detecting and reacting to asset price misalignments. The confluence of the turn in asset prices, financial market crisis and slump in trade challenged the ability of counter-cyclical policies to cope with the severe downturn, although experience reveals that countries where the fiscal position was sound and inflation under control were better able to cushion the shocks. Furthermore, robust micro-prudential regulation can help the financial sector withstand shocks. In this light, existing policies should be strengthened to ensure that there is room for manoeuvre going into a downturn. In order to deal with similar shocks in the future, macroeconomic and financial sector policies should consider precautionary policy settings and macro-prudential regulation to address systemic threats to stability. Politique économique contracyclique Quels changements sont necessaires pour que la politique economique contracyclique soit plus efficace a l.issue de la crise ? On peut tirer une lecon essentielle de la recession recente : il faudra que, dans plusieurs domaines, la politique economique soit plus prudente en periode d.expansion et comporte plus de marges de securite pour pouvoir reagir a un choc de grande ampleur. Avant la crise, on a pu observer une plus grande synchronisation des cycles et une plus forte volatilite des prix des actifs. Les evenements recents mettent egalement en lumiere les difficultes rencontrees pour detecter les dephasages des prix des actifs et pour y reagir. La conjonction d.un retournement des prix des actifs, d.une crise financiere et d.un effondrement des echanges fait que les mesures contracycliques n.ont plus ete a meme de contrecarrer une profonde recession. Cela etant, l.experience montre que les pays dont les finances publiques etaient saines et l.inflation maitrisee ont pu mieux amortir les chocs. De plus, une solide reglementation microprudentielle peut aider le secteur financier a resister en cas de choc. C.est pourquoi il faudrait renforcer les politiques actuelles pour conserver une marge de manoeuvre face a une recession. Pour parer a des chocs similaires a l.avenir, les mesures macroeconomiques et celles applicables au secteur financier devraient s.appuyer sur un cadre d.action guide par la precaution et sur une reglementation macroprudentielle afin d.ecarter les menaces pour la stabilite qui ont un caractere systemique.

Suggested Citation

  • Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:760-en
    DOI: 10.1787/5kmfw36tj97h-en
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    Cited by:

    1. Everaert, Gerdie & Jansen, Stijn, 2018. "On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?," Economic Modelling, Elsevier, vol. 70(C), pages 87-96.
    2. Daniel Fuentes Castro, 2014. "Evidences of maturity mismatching of loans in OECD housing markets between 1995 and 2008," Applied Economics, Taylor & Francis Journals, vol. 46(12), pages 1301-1311, April.
    3. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2016. "Economic Resilience: What Role for Policies?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-44, June.
    4. Boris Cournède & Antoine Goujard & Álvaro Pina, 2013. "How to Achieve Growth- and Equity-friendly Fiscal Consolidation?: A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries," OECD Economics Department Working Papers 1088, OECD Publishing.
    5. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
    6. Cerón, Juan A., 2012. "La respuesta de la política fiscal a la actividad económica en los países desarrollados/Fiscal policy reaction to economic activity in developed countries," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 30, pages 369(32)-369, Abril.
    7. Rossana Merola & Douglas Sutherland, 2012. "Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations," OECD Economics Department Working Papers 934, OECD Publishing.
    8. Tatiana Lysenko & Geoff Barnard, 2011. "Strengthening the Macroeconomic Policy Framework in South Africa," OECD Economics Department Working Papers 847, OECD Publishing.
    9. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
    10. Guido Baldi & Karsten Staehr, 2013. "The European Debt Crisis and Fiscal Reaction Functions in Europe 2000-2012," Discussion Papers of DIW Berlin 1295, DIW Berlin, German Institute for Economic Research.
    11. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
    12. Jalles, João Tovar, 2021. "Dynamics of government spending cyclicality," Economic Modelling, Elsevier, vol. 97(C), pages 411-427.
    13. Douglas Sutherland & Peter Hoeller, 2014. "Growth Policies and Macroeconomic Stability," OECD Economic Policy Papers 8, OECD Publishing.
    14. Jamal Bouoiyour & Refk Selmi, 2016. "The responses of BRICS Equities to China's Slowdown: A Multi-Scale Causality Analysis," Working Papers hal-01880323, HAL.
    15. Oana Simona Hudea, 2018. "Faculty of Business and Administration, University of Bucharest, Romania," Manager Journal, Faculty of Business and Administration, University of Bucharest, vol. 28(1), pages 24-32, December.

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    More about this item

    Keywords

    financial sector regulation; macroeconomic policies; politique macro-économique; réglementation du secteur financier;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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