Munich Personal RePEc Archive

Fiscal Policy in an Emerging Market Business Cycle Model

Ghate, Chetan and Gopalakrishnan, Pawan and Tarafdar, Suchismita (2014): Fiscal Policy in an Emerging Market Business Cycle Model.


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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 qualitatively some of the key features of the Indian business cycle.

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