Reinhart, Carmen and Kaminsky, Graciela and Vegh, Carlos (2004): When it rains, it pours: Procyclical capital flows and macroeconomic policies. Published in: NBER Macroeconomics Annual 2004 (2005): pp. 11-53.
Download (275kB) | Preview
Based on a sample of 104 countries, we document four key stylized facts regarding the interaction between capital flows, fiscal policy, and monetary policy. First, net capital inflows are procyclical (i.e., external borrowing increases in good times and falls in bad times) in most OECD and developing countries. Second, fiscal policy is procyclical (i.e., government spending increases in good times and falls in bad times) for the majority of developing countries. Third, for emerging markets, monetary policy appears to be procyclical (i.e., policy rates are lowered in good times and raised in bad times). Fourth, in developing countries – and particularly for emerging markets – periods of capital inflows are associated with expansionary macroeconomic policies and periods of capital outflows with contractionary macroeconomic policies. In such countries, therefore, when it rains, it does indeed pour.
|Item Type:||MPRA Paper|
|Original Title:||When it rains, it pours: Procyclical capital flows and macroeconomic policies|
|Keywords:||fiscal policy capital flows interest rates cycles monetary policy government spending growth|
|Subjects:||F - International Economics > F3 - International Finance > F30 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General
|Depositing User:||Carmen Reinhart|
|Date Deposited:||10 Mar 2009 05:39|
|Last Modified:||07 Oct 2016 21:35|
Aghion, Phillipe, Philippe Bacchetta and Abhijit Banerjee, “Currency Crises and Monetary Policy in an Economy with Credit Constraints,” European Economic Review, Vol. 45 (2001), pp. 1121-1150.
Aizenman, Joshua, Michael Gavin, and Ricardo Hausmann, "Optimal Tax Policy with Endogenous Borrowing Constraints," NBER Working Paper No. 5558 (1996).
Aguiar, Mark, and Gita Gopinath, “Emerging Market Business Cycles: The Cycle is the Trend,” mimeo (University of Chicago, 2004).
Baxter, Marianne, and Robert G. King. “Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series.” Review of Economics and Statistics 81 (1999): 575–93.
Braun, Miguel, “Why Is Fiscal Policy Procyclical in Developing Countries” (mimeo, Harvard University, 2001).
Calderon, Cesar and Klaus Schmidt-Hebbel, “Macroeconomic Policies and Performance in Latin America,” Journal of International Money and Finance, Vol. 22 (2003), pp. 895-923.
Calvo, Guillermo A. "On the Costs of Temporary Policy," Journal of Development Economics, Vol. 27 (1987), pp. 245-262.
Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,” IMF Staff Papers, Vol. 40 (1993), pp. 108-151.
Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, “The Capital Inflows Problem: Concepts and Issues,” Contemporary Economic Policy, Vol. XII (1994), pp. 54-66.
Calvo, Guillermo A. and Carlos A. Végh, "Inflation Stabilization and BOP Crises in Developing Countries" in John Taylor and Michael Woodford, eds., Handbook of Macroeconomics (Volume C; North Holland, 1999), pp. 1531-1614.
Chari, V.V. and Patrick Kehoe, “Optimal Fiscal and Monetary Policy,” NBER Working Papers No. 6891 (1999).
Clarida, Richard, Jordi Gali, and Mark Gertler, “Monetary Policy Rules in Practice: Some International Evidence,” NBER Working Paper No. 6254 (1997).
Clarida, Richard, Jordi Gali, and Mark Gertler, “The Science of Monetary Policy; A New Keynesian Perspective,” Journal of Economic Literature, Vol. 37 (1999), pp. 1161-1707.
Corbo, Vittorio, “Monetary Policy in Latin America in the 90s,” Central Bank of Chile Working Paper No. 78 (2000).
Cuddington, John, “Commodity Export Booms in Developing Countries” The World Bank Research Observer, Vol. 4, No. 2, July 1989, 143-165.
Dixon, Jay, “Voracity, Volatility, and Growth” (mimeo, UCLA, 2003).
Drazen, Alan, “Interest Rate and Borrowing Defense Against Speculative Attack,” Carnegie-Rochester Series on Public Policy, Vol. 53 (2000).
Flood, Robert P. and Olivier Jeanne, “An Interest Rate Defense of a Fixed Exchange Rate?” IMF Working Paper No. 00/159 (2000).
Gavin, Michael, and Roberto Perotti, “Fiscal Policy in Latin America,” NBER Macroeconomics Annual (Cambridge, Mass.: MIT Press, 1997), pp. 11-61.
Gupta, Sanjeev, Benedict Clements, Bernardin Akitoby, and Gabriela Inchauste, “The Cyclicality of Government Spending in Developing Countries” (mimeo, IMF, 2004).
Lahiri, Amartya and Carlos A. Végh, “Delaying the Inevitable: Interest Rate Defense and BOP Crises," Journal of Political Economy, Vol. 111 (2003), pp. 404-424.
Lahiri, Amartya and Carlos A. Végh, “On the Non-Monotonic Relation between Interest Rates and the Exchange Rate,” mimeo (New York Fed and UCLA, 2004).
Lane, Philip, “The Cyclical Behavior of Fiscal Policy: Evidence from the OECD” Journal of Public Economics, Vol. 87 (2003a), pp. 2661-2675.
Lane, Philip, “Business Cycles and Macroeconomic Policy in Emerging Market Economies” (mimeo, Trinity College, Dublin, 2003b).
Lane, Philip and Aaron Tornell, “Why Aren’t Latin American Savings Rates Procyclical? Journal of Development Economics, Vol. 57 (1998), pp. 185-200.
Moron, Eduardo and Juan Francisco Castro, 2000, “Uncovering Central Bank’s Monetary Policy Objective: Going Beyond the Fear of Floating,” (mimeo, Universidad del Pacifico).
Neumeyer, Pablo A., and Fabrizio Perri, “Business Cycles in Emerging Economies: The Role of Interest Rates,” NBER Working Paper No. 10837 (2004).
Pallage, Stephane, and Michel A. Robe, “Foreign Aid and the Business Cycle,” Review of International Economics, Vol. 9 (2001), pp. 637-668.
Phelps, Edmund (1973), “Inflation in the Theory of Public Finance,” Swedish Journal of Economics, Vol. (75), pp. 67-82.
Reinhart, Carmen M. and Kenneth S. Rogoff. “The Modern History of Exchange Rate Arrangements: A Reinterpretation.” Quarterly Journal of Economics, Vol. CXIX No. 1, February 2004, 1-48
Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano. “Debt Intolerance,” in William Brainard and George Perry, eds., Brookings Papers on Economic Activity, Vol.1 Spring 2003, 1-74.
Riascos, Alvaro and Carlos A. Végh, “Procyclical Fiscal Policy in Developing Countries: The Role of Incomplete Markets” (mimeo, UCLA and Banco Republica, Colombia, 2003).
Talvi, Ernesto, and Carlos A. Végh, “Tax Base Variability and Procyclical Fiscal Policy,” NBER Working Paper No. 7499 (2000), forthcoming Journal of Development Economics.
Taylor, John, “Discretion versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, Vol. 39 (1993), pp. 195-214.
Tornell, Aaron and Philip Lane, "The Voracity Effect," American Economic Review, Vol. 89 (1999), pp. 22-46.
World Bank, various issues. Global Development Finance. (Washington DC: The World Bank).