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Do Good Institutions Promote Counter-Cyclical Macroeconomic Policies?

Listed author(s):
  • César Calderón
  • Roberto Duncan
  • Klaus Schmidt-Hebbel

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.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 419.

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Date of creation: 2012
Handle: RePEc:ioe:doctra:419
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