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Economic Crises, Stabilisation Policy and Output in Emerging Market Economies

Author

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  • Leon du Toit

    () (Bureau for Economic Research, University of Stellenbosch)

Abstract

The recent macroeconomic history of emerging market economies is coloured with economic crises of all kinds, ranging from debt-crises, through hyperinflationary periods to currency crises to name but a few. Much of the empirical literature notes that alongside fast-paced structural change this has resulted in volatile business cycles and a difficult environment for stabilisation policy. Both short- and long-run output dynamics are shaped by the multidimensional exposure of EMEs to economic shocks. The paper uses an SVAR analysis and finds that in spite of high degrees of output volatility, the conduct of stabilisation policy has sometimes been successful in dampening short-run output fluctuations. However, even when stabilisation has been successful, the effect on overall output volatility has been negligible when compared to supply-side shocks. The results show that economic crises are associated with large negative supply shocks which are only counteracted by stabilisation policy to a very small extent. These crisis-related supply shocks, in turn, have large negative effects on potential GDP growth, which are only reversible when positive supply shocks regain lost ground. Given the institutional origin of the economic crises, the paper suggests that for stabilisation policy to become more effective in lowering output volatility and maintaining long-term growth potential, it must be supported by appropriate supply-side measures which insulate EMEs against large negative supply shocks and help them to recover in the wake of economic crises.

Suggested Citation

  • Leon du Toit, 2009. "Economic Crises, Stabilisation Policy and Output in Emerging Market Economies," Working Papers 20/2009, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers93
    as

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    File URL: https://www.ekon.sun.ac.za/wpapers/2009/wp202009/wp-20-2009.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic crises; Stabilisation policy; Emerging Market Economies; Business Cycles; Potential output;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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