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Economic Crises, Stabilisation Policy and Output in Emerging Market Economies

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  • Leon du Toit

    ()
    (Bureau for Economic Research, University of Stellenbosch)

Abstract

The recent macroeconomic history of emerging market economies is coloured with economic crises of all kinds, ranging from debt-crises, through hyperinflationary periods to currency crises to name but a few. Much of the empirical literature notes that alongside fast-paced structural change this has resulted in volatile business cycles and a difficult environment for stabilisation policy. Both short- and long-run output dynamics are shaped by the multidimensional exposure of EMEs to economic shocks. The paper uses an SVAR analysis and finds that in spite of high degrees of output volatility, the conduct of stabilisation policy has sometimes been successful in dampening short-run output fluctuations. However, even when stabilisation has been successful, the effect on overall output volatility has been negligible when compared to supply-side shocks. The results show that economic crises are associated with large negative supply shocks which are only counteracted by stabilisation policy to a very small extent. These crisis-related supply shocks, in turn, have large negative effects on potential GDP growth, which are only reversible when positive supply shocks regain lost ground. Given the institutional origin of the economic crises, the paper suggests that for stabilisation policy to become more effective in lowering output volatility and maintaining long-term growth potential, it must be supported by appropriate supply-side measures which insulate EMEs against large negative supply shocks and help them to recover in the wake of economic crises.

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File URL: http://www.ekon.sun.ac.za/wpapers/2009/wp202009/wp-20-2009.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 20/2009.

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Date of creation: 2009
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Handle: RePEc:sza:wpaper:wpapers93

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Related research

Keywords: Economic crises; Stabilisation policy; Emerging Market Economies; Business Cycles; Potential output;

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  1. Young Lee & Changyong Rhee & Taeyoon Sung, 2006. "Fiscal policy in Korea: Before and after the financial crisis," International Tax and Public Finance, Springer, vol. 13(4), pages 509-531, August.
  2. Calderon, Cesar & Fuentes, Rodrigo, 2010. "Characterizing the business cycles of emerging economies," Policy Research Working Paper Series 5343, The World Bank.
  3. Sebastian Dullien, 2005. "Measuring China's Fiscal Policy Stance," Macroeconomics 0502032, EconWPA.
  4. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  5. Leon du Toit, 2008. "Optimal HP filtering for South Africa," Working Papers 07/2008, Stellenbosch University, Department of Economics.
  6. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  7. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
  8. Stan du Plessis, 2006. "Business Cycles in Emerging market Economies: A New View of the Stylised Facts," Working Papers 02/2006, Stellenbosch University, Department of Economics.
  9. Stan Du plessis & Ben Smit & Federico Sturzenegger, 2007. "The Cyclicality Of Monetary And Fiscal Policy In South Africa Since 1994," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 391-411, 09.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  11. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
  12. Young Lee & Taeyoon Sung, 2007. "Fiscal Policy, Business Cycles and Economic Stabilisation: Evidence from Industrialised and Developing Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 28(4), pages 437-462, December.
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