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The Role of Credibility in the Cyclical Properties of Macroeconomic Policies in Emerging Economies

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César Calderón
Roberto Duncan
Klaus Schmidt-Hebbel

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Abstract

Optimal stabilization policy is counter-cyclical, aiming at keeping output close to its potential. However it has been traditionally argued that emerging economies are unable to adopt counter-cyclical monetary and fiscal policy. 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 pro-cyclical policies. For Chile we find that both monetary and fiscal policies have been largely counter-cyclical after 1993.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 237.

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Date of creation: Nov 2003
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Handle: RePEc:chb:bcchwp:237

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  2. Torsten Persson, 2001. "Do Political Institutions Shape Economic Policy?," NBER Working Papers 8214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Philip R. Lane, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," Trinity Economics Papers 20032, Trinity College Dublin, Department of Economics. [Downloadable!]
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  5. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring. [Downloadable!] (restricted)
  6. Taylor, John B, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall. [Downloadable!] (restricted)
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  7. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
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  8. Gabriela Contreras M & Pablo García S, 2002. "Estimating Gaps and Trends for the Chilean Economy," Working Papers Central Bank of Chile 165, Central Bank of Chile. [Downloadable!]
  9. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank. [Downloadable!]
  10. Calderon, Cesar & Schmidt-Hebbel, Klaus, 2003. "Macroeconomic policies and performance in Latin America," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 895-923, December. [Downloadable!] (restricted)
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  11. Felipe G. Morandé & Matías Tapia, 2002. "Exchange Rate Policy in Chile: From the Band to Floating and Beyond," Working Papers Central Bank of Chile 152, Central Bank of Chile. [Downloadable!]
  12. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August. [Downloadable!] (restricted)
  13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
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  15. Enrique G. Mendoza, 2002. "Why Should Emerging Economies Give up National Currencies: A Case for 'Institutions Substitution'," NBER Working Papers 8950, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Budnevich L., Carlos, 2002. "Countercyclical Fiscal Policy, A Review of the Literature, Empirical Evidence and some Policy Proposals," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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  1. Montiel, Peter & Serven, Luis, 2004. "Macroeconomic stability in developing countries - How much is enough?," Policy Research Working Paper Series 3456, The World Bank. [Downloadable!]
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  2. Pablo Gonzalez & Mauricio Tejada, 2006. "No linealidades en la regla de política monetaria del Banco Central de Chile: una evidencia empírica," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 21(1), pages 81-115, July. [Downloadable!]
    Other versions:
  3. Christian A. Johnson & Rodrigo Vergara, 2005. "The implementation of monetary policy in an emerging economy: the case of Chile," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 20(1), pages 45-62, June. [Downloadable!]
    Other versions:
  4. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: The Case of Chile," Working Papers Central Bank of Chile 312, Central Bank of Chile. [Downloadable!]
  5. Erdal Atukeren, 2006. "Politico-Economic Determinants of the Crowding-in Effects of Public Investments in Developing Countries," Working papers 06-126, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  6. Mackiewicz, Michał, 2008. "Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries," MPRA Paper 16034, University Library of Munich, Germany. [Downloadable!]
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