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Fiscal policy in an emerging market business cycle model
Ghate C., Gopalakrishnan P.,
Published in Elsevier B.V.
Volume: 14
Pages: 52 - 77
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 some of the key features of the Indian business cycle. © 2016 Elsevier B.V.
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Published in Elsevier B.V.
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