Fiscal policy in an emerging market business cycle model

Chetan Ghate, Pawan Gopalakrishnan and Suchismita Tarafdar

The Journal of Economic Asymmetries, 2016, vol. 14, issue PA, 52-77

Abstract: Emerging market economy business cycles are typically characterized by high consumption and output volatility, strongly counter-cyclical current accounts, and counter-cyclical real interest rates. Evidence from the wider EME and less developed economy business cycle experience suggests however that real interest rates can also be pro-cyclical. We reconcile the pro-cyclicality of real interest rates with the above facts by embedding fiscal policy into a standard emerging market business cycle model. We show that fiscal policy makes real interest rates a-cyclical or pro-cyclical. We use the model to replicate some of the key features of the Indian business cycle.

Keywords: Emerging market business cycles; Fiscal policy in a small open economy; Indian business cycle; Interest rate shocks; Macroeconomic stabilization (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 H2 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Fiscal policy in an emerging market business cycle model (2014)
Working Paper: Fiscal Policy in an Emerging Market Business Cycle Model (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:14:y:2016:i:pa:p:52-77

DOI: 10.1016/j.jeca.2016.07.004

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