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Do Good Institutions Promote Countercyclical Macroeconomic Policies?
Author(s) -
Calderón César,
Duncan Roberto,
SchmidtHebbel Klaus
Publication year - 2016
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12132
Subject(s) - economics , fiscal policy , monetary policy , developing country , monetary economics , sample (material) , quality (philosophy) , politics , business cycle , macroeconomics , international economics , economic policy , economic growth , political science , philosophy , chemistry , epistemology , chromatography , law
The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavourable political‐economy conditions. Using a world sample of up to 112 industrial and developing countries for 1984–2008, we find that the level of institutional quality plays a key role in countries’ ability and willingness to implement countercyclical macroeconomic policies. Countries with strong (weak) institutions adopt countercyclical (procyclical) macroeconomic policies, reflected in extended monetary policy and fiscal policy rules. The threshold levels of institutional quality at which policies are acyclical are found to be similar for monetary and fiscal policy.