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Economic Crises, Stabilisation Policy and Output in Emerging Market Economies

  • Leon du Toit

    ()

    (Bureau for Economic Research, University of Stellenbosch)

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.

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File URL: http://www.ekon.sun.ac.za/wpapers/2009/wp202009/wp-20-2009.pdf
File Function: First version, 2009
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Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 20/2009.

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Date of creation: 2009
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Handle: RePEc:sza:wpaper:wpapers93
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