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Institutions and Cyclical Properties of Macroeconomic Policies

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  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

Abstract

Strong swings in business cycle conditions in industrial and emerging market economies (EMEs) alike have renewed the debate on effectiveness of stabilization policies. Traditionally it has been argued that EMEs are unable to pursue counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy equilibriums. However, we claim that EMEs with institutional features similar to those of industrial countries may be able to conduct counter-cyclical policies. Using a sample of 20 EMEs and annual data for the 1990-2003 period, we find that the level of institutional quality plays a key role in the ability of these economies to conduct stabilizing macroeconomic policies. We show that EMEs with strong institutions are able to implement counter-cyclical macroeconomic policies —reflected in extended monetary-policy (Taylor) and fiscal-policy rules.

Suggested Citation

  • César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2004. "Institutions and Cyclical Properties of Macroeconomic Policies," Working Papers Central Bank of Chile 285, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:285
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    References listed on IDEAS

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    1. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
    2. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
    3. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications 4032, Inter-American Development Bank, Research Department.
    4. Alberto Alesina & Alexander F. Wagner, 2006. "Choosing (and Reneging on) Exchange Rate Regimes," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 770-799, June.
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    Cited by:

    1. Jean-Louis COMBES & Mary-Françoise RENARD & Sampawende Jules TAPSOBA, 2015. "Provincial Public Expenditure in China: A Tale of Profligacy," Working Papers 201524, CERDI.
    2. César Calderón & Klaus Schmidt-Hebbel, 2008. "Business Cycles and Fiscal Policies: the Role of Institutions and financial Markets," Working Papers Central Bank of Chile 481, Central Bank of Chile.
    3. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
    4. Philippe Aghion & David Hemous & Enisse Kharroubi, 2009. "Credit Constraints, Cyclical Fiscal Policy and Industry Growth," NBER Working Papers 15119, National Bureau of Economic Research, Inc.
    5. Muhammad Ali Choudhary & Muhammad Nadim Hanif & Sajawal Khan & Muhammad Rehman, 2012. "Procyclical Monetary Policy and Governance," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 8, pages 33-43.
    6. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
    7. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. Jeffrey Frankel, 2013. "A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 9, pages 323-391 Central Bank of Chile.
    9. Fayyaz Hussain & Constance Kabibi Kimuli, 2012. "Determinants of Foreign Direct Investment to Developing Countries," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 8, pages 13-31.
    10. Balázs Égert, 2014. "Fiscal policy reaction to the cycle in the OECD: pro- or counter-cyclical?," Mondes en développement, De Boeck Université, vol. 0(3), pages 35-52.
    11. BIKAI, J. Landry, 2015. "Fiscal Rules and Pro-cyclicality of the Fiscal Policy in CEMAC countries," MPRA Paper 78229, University Library of Munich, Germany.
    12. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout The Business Cycle: The Colombian Experience," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 25(55), pages 12-39, December.
    13. Marcelo Ochoa & Klaus Schmidt-Hebbel, 2006. "El Banco Central de Chile en Comparación con los Bancos Centrales del Mundo," Working Papers Central Bank of Chile 367, Central Bank of Chile.
    14. Sampawende J Tapsoba & Robert C York & Neree C.G.M. Noumon, 2016. "Can Statistical Capacity Building Help Reduce Procyclical Fiscal Policy in Developing Countries?," IMF Working Papers 16/209, International Monetary Fund.
    15. Shaig Adigozalov & Vugar Rahimov, 2015. "Institutional Quality, Cyclicality of Macroeconomic Policies and the Effects of Macroeconomic Shocks: Evidence from Transition Economies," IHEID Working Papers 23-2015, Economics Section, The Graduate Institute of International Studies.
    16. Enisse Kharroubi & Philippe Aghion, 2008. "Cyclical Macro Policy and Industry Growth: The effect of counter-cyclical fiscal policy," 2008 Meeting Papers 837, Society for Economic Dynamics.

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