Economic Crises, Stabilisation Policy and Output in Emerging Market Economies

Stellenbosch Working Paper Series No. WP20/2009
 
Publication date: 2009
 
Author(s):
[protected email address] (Bureau for Economic Research, University of Stellenbosch)
 
Abstract:

The recent macroeconomic history of emerging market economies is coloured with economic crises of all kinds, ranging from debt-crises, through hyperinflationary periods to currency crises to name but a few. Much of the empirical literature notes that alongside fast-paced structural change this has resulted in volatile business cycles and a difficult environment for stabilisation policy. Both short- and long-run output dynamics are shaped by the multidimensional exposure of EMEs to economic shocks. The paper uses an SVAR analysis and finds that in spite of high degrees of output volatility, the conduct of stabilisation policy has sometimes been successful in dampening short-run output fluctuations. However, even when stabilisation has been successful, the effect on overall output volatility has been negligible when compared to supply-side shocks. The results show that economic crises are associated with large negative supply shocks which are only counteracted by stabilisation policy to a very small extent. These crisis-related supply shocks, in turn, have large negative effects on potential GDP growth, which are only reversible when positive supply shocks regain lost ground. Given the institutional origin of the economic crises, the paper suggests that for stabilisation policy to become more effective in lowering output volatility and maintaining long-term growth potential, it must be supported by appropriate supply-side measures which insulate EMEs against large negative supply shocks and help them to recover in the wake of economic crises.

 
JEL Classification:

C32, E32, E61, E63

Keywords:

Economic crises, Stabilisation policy, Emerging Market Economies, Business Cycles, Potential output

Download: PDF (763 KB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

13 September 2021
It was a data-heavy week in SA, with the 2021Q2 real GDP data indicating that the economy had better-than-expected recovery momentum in the first half of the year. While growth remained solid in the second quarter, both the survey and actual data released last week revealed the significant impact that the range of shocks at the start of the third quarter...

Read the full issue
 

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

13 September 2021
It was a data-heavy week in SA, with the 2021Q2 real GDP data indicating that the economy had better-than-expected recovery momentum in the first half of the year. While growth remained solid in the second quarter, both the survey and actual data released last week revealed the significant impact that the range of shocks at the start of the third quarter...

Read the full issue