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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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 237.

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Date of creation: Nov 2003
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Handle: RePEc:chb:bcchwp:237
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  1. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  2. 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.
  3. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  4. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1999. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 103-134 National Bureau of Economic Research, Inc.
  5. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  6. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
  7. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  8. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
  9. Torsten Persson, 2002. "Do Political Institutions Shape Economic Policy?," Econometrica, Econometric Society, vol. 70(3), pages 883-905, May.
  10. Ángel Cabrera & Luis Felipe Lagos, 2002. "Monetary Policy in Chile: A Black Box?," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 8, pages 197-246 Central Bank of Chile.
  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.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  14. Gabriel Contreras & Pablo García, 2002. "Estimating Gaps and Trends for the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 15, pages 523-554 Central Bank of Chile.
  15. César Calderón & Klaus Schmidt-Hebbel, 2003. "Macroeconomic Policies and Performance in Latin America," Working Papers Central Bank of Chile 217, Central Bank of Chile.
  16. Vittorio Corbo, 2000. "Monetary Policy in Latin America in the 90s," Working Papers Central Bank of Chile 78, Central Bank of Chile.
  17. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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