Macroeconomic Policies and Business Cycle: The Role of Institutions in Selected SAARC Countries

Samina Sabir and Khushbakht Zahid
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Samina Sabir: Pakistan Institute of Development Economics, Islamabad
Khushbakht Zahid: Pakistan Institute of Development Economics, Islamabad

The Pakistan Development Review, 2012, vol. 51, issue 4, 147-160

Abstract: Based on the sample of selected SAARC countries over the period 1984-2009, we assess two stylised facts regarding interaction between monetary, fiscal policies and institutions. First, monetary policy conducted in SAARC countries to control inflation and to smooth output gap is pro-cyclical due to poor quality of institutions. Second, fiscal policy is pro-cyclical in SAARC low income countries. We introduce interaction term between GDP gap and institution quality measured by ICRG index. We use simple and dynamic panel data techniques to estimate the reaction functions. We find that policies conducted in SAARC countries are pro-cyclical due to poor quality institutions. Therefore, these policies cause further distortion in business cyclical fluctuation.

Date: 2012
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