Working Paper: NBER ID: w18175
Authors: Carlos A. Vegh; Guillermo Vuletin
Abstract: Developing countries have typically pursued procyclical macroeconomic policies, which tend to amplify the underlying business cycle (the "when-it-rains-it-pours" phenomenon). There is, however, evidence to suggest that about a third of developing countries have shifted from procyclical to countercyclical fiscal policy over the last decade. We show that the same is true of monetary policy: around 35 percent of developing countries have become countercyclical over the last decade. We provide evidence that links procyclical monetary policy in developing countries to what we refer as the "fear of free falling;" that is, the need to raise interest rates in bad times to defend the domestic currency.
Keywords: No keywords provided
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy cyclicality (E39) | fear of free falling (D84) |
| Institutional quality improvement (I24) | fear of free falling decrease (G41) |
| fear of free falling decrease (G41) | countercyclical monetary policy (E52) |
| countercyclical monetary policy (E52) | economic stimulation during downturns (E65) |
| fear of free falling (D84) | procyclical monetary policy (E52) |