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Do Good Institutions Promote Counter-Cyclical Macroeconomic Policies?

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  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

Abstract

The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countries’ ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected inextended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar.

Suggested Citation

  • César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2012. "Do Good Institutions Promote Counter-Cyclical Macroeconomic Policies?," Documentos de Trabajo 419, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:419
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ibrahim Elbadawi & Klaus Schmidt-Hebbel & Raimundo Soto, 2015. "Why do Countries have Fiscal Rules?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 18(3), pages 28-61, December.
    2. repec:eee:jebusi:v:96:y:2018:i:c:p:42-58 is not listed on IDEAS
    3. repec:eee:exehis:v:68:y:2018:i:c:p:37-70 is not listed on IDEAS
    4. Combes, Jean-Louis & Minea, Alexandru & Sow, Moussé, 2017. "Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules," Economic Modelling, Elsevier, vol. 65(C), pages 138-146.
    5. repec:fip:feddgm:00014 is not listed on IDEAS
    6. Jean-Louis COMBES & Mary-Françoise RENARD & Sampawende Jules TAPSOBA, 2015. "Provincial Public Expenditure in China: A Tale of Profligacy," Working Papers 201524, CERDI.
    7. repec:ris:revlde:1944 is not listed on IDEAS
    8. Paret, Anne-Charlotte, 2017. "Debt sustainability in emerging market countries: Some policy guidelines from a fan-chart approach," Economic Modelling, Elsevier, vol. 63(C), pages 26-45.
    9. Bergman, U. Michael & Hutchison, Michael, 2015. "Economic stabilization in the post-crisis world: Are fiscal rules the answer?," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 82-101.
    10. María Franco Chuaire & Carlos Scartascini & Mariano Tommasi, 2017. "State capacity and the quality of policies. Revisiting the relationship between openness and government size," Economics and Politics, Wiley Blackwell, vol. 29(2), pages 133-156, July.
    11. Wirginia Doryñ & Micha³ Mackiewicz & Dorota Wawrzyniak, 2018. "The Role of Institutions in Determining the Cyclical Behavior of Fiscal Policy," Lodz Economics Working Papers 2/2018, University of Lodz, Faculty of Economics and Sociology.
    12. 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.
    13. repec:ebl:ecbull:eb-17-00229 is not listed on IDEAS
    14. Cleomar Gomes da silva & Flavio V. Vieira, 2016. "Monetary policy decision making: the role of ideology, institutions and central bank independence," Economics Bulletin, AccessEcon, vol. 36(4), pages 2051-2062.
    15. Bergman, U. Michael & Hutchison, Michael M. & Jensen, Svend E. Hougaard, 2016. "Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency," European Journal of Political Economy, Elsevier, vol. 44(C), pages 1-19.
    16. Punam Chuhan-Pole & Cesar Calderon & Gerard Kambou & Sebastien Boreux & Mapi M. Buitano & Vijdan Korman & Megumi Kubota, "undated". "Africa's Pulse, October 2015," World Bank Other Operational Studies 22722, The World Bank.

    More about this item

    Keywords

    Counter-cyclical macroeconomic policies; institutions; fiscal policy; monetary policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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