The role of credibility in the cyclical properties of macroeconomic policies in emerging economies |
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Authors: | César?Calderón Roberto?Duncan Email author" target="_blank">Klaus?Schmidt-HebbelEmail author |
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Institution: | (1) Central Bank of Chile, Agustinas 1180, Santiago, Chile |
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Abstract: | Optimal stabilization policy is countercyclical, aiming at keeping output close to its potential. However it has been traditionally
argued that emerging countries are unable to adopt countercyclical monetary and fiscal policies. Here we argue that the cyclical
properties of macroeconomic policies depend critically on policy credibility. We test this proposition by making use of recent
panel data for eleven emerging market economies and time series data for Chile. The evidence supports that countries with
higher credibility, as reflected by lower country risk levels, are able to conduct countercyclical fiscal and monetary policies.
Conversely, countries with less credible policies (and, therefore, with higher country risk spreads) contribute to larger
cyclical fluctuations by applying procyclical policies. For Chile we find that both monetary and fiscal policies have been
largely countercyclical after 1993. JEL no. E43, E52, E62 |
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Keywords: | Monetary and fiscal policy cyclical stance policy rules |
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