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Institutions and Cyclical Properties of Macroeconomic Policies

  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

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.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 285.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:285
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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. 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, 06.
  3. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," IDB Publications (Working Papers) 6797, Inter-American Development Bank.
  4. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
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