Macroeconomic stabilization in developing economies: Are optimal policies procyclical?

Demirel, Ufuk Devrim

doi:10.1016/j.euroecorev.2009.08.008

Cited by 21 publications

(5 citation statements)

References 30 publications

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“…The elasticities of substitution between intermediate domestic goods among themselves,   , and imported goods among themselves,   , are set to the same value, 10. This value is close to those used for instance by Medina and Soto (2007) for Chile and by Demirel (2010) and Quint and Rabanal (2014); it gives a steady-state estimate of the markup rate,   (  − 1), equal to 111 percent. The instantaneous pass-through coefficient is set at   = 03; this is line with the evidence suggesting a decline in the strength of the pass-through effect in recent years in both industrial and developing countries, possibly as a result of increased integration of global value chains (see Bussière et al (2014), Devereux and Yetman (2014), and Ahmed et al…”

Section: The Distribution Parameter Between Domestic and Imported Intsupporting

confidence: 87%

External shocks, financial volatility and reserve requirements in an open economy

Agénor

Alper

Silva

2018

Journal of International Money and Finance

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The performance of a simple, countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. An optimal, credit-based reserve requirement rule, based on minimizing a composite loss function, helps to mitigate both macroeconomic and financial volatility-with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. Greater reliance on sterilization implies a less aggressive optimal reserve requirements rule, implying that the two instruments are partial substitutes.

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Section: The Distribution Parameter Between Domestic and Imported Intsupporting

confidence: 87%

External shocks, financial volatility and reserve requirements in an open economy

Agénor

Alper

Silva

2018

Journal of International Money and Finance

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“…Demirel (2010), for example, shows that the existence of country spread can explain how optimal fiscal 8 and monetary policies can be procyclical. Leith, Moldovan, and Rossi (2009) argue that with superficial habits, the optimal simple rule might exhibit a negative response to the output gap.…”

Section: Current-looking Taylor Rulementioning

confidence: 99%

An Analytical and Numerical Search for Bifurcations in Open Economy New Keynesian Models

Barnett

Eryilmaz

2014

Macroecon. Dynam.

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“…Venables (2011), I set the private and public capital shares in the domestic output, α and γ, equal to 0.4 and 0.25 respectively. The inverse of the labor supply elasticity ψ is set equal to 1 (as inDevereux et al (2006), Demirel (2010). For the baseline calibration, the value of the parameter κ is chosen to make the elasticity of intertemporal substitution is equal to 0.75 (as in van der Ploeg and Venables (2011)).…”

mentioning

confidence: 99%

Optimal fiscal policy and different degrees of access to international capital markets

Kuralbayeva

2013

Journal of Development Economics

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Empirically, the cyclical pattern of fiscal policy differs between developed and developing countries, with in particular much greater pro-cyclicality and volatility of public investment in developing countries. In this paper I provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets. If the supply of foreign capital is elastic, as in a developed country, then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption. If the supply of foreign capital is inelastic, however, as in a developing country, the optimal adjustment policy is to reduce public investment (by much more than public consumption) and to raise consumption taxes.

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Macroeconomic stabilization in developing economies: Are optimal policies procyclical?

Cited by 21 publications

References 30 publications

External shocks, financial volatility and reserve requirements in an open economy

External shocks, financial volatility and reserve requirements in an open economy

An Analytical and Numerical Search for Bifurcations in Open Economy New Keynesian Models

Optimal fiscal policy and different degrees of access to international capital markets

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