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The role of credibility in the cyclical properties of macroeconomic policies in emerging economies

  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

    ()

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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Article provided by Springer in its journal Review of World Economics.

Volume (Year): 140 (2004)
Issue (Month): 4 (December)
Pages: 613-633

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Handle: RePEc:spr:weltar:v:140:y:2004:i:4:p:613-633
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  1. César Calderón & Klaus Schmidt-Hebbel, 2003. "Macroeconomic Policies and Performance in Latin America," Working Papers Central Bank of Chile 217, Central Bank of Chile.
  2. 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.
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  10. 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.
  11. 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.
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  17. Philip R. Lane, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," Trinity Economics Papers 20032, Trinity College Dublin, Department of Economics.
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