Macroeconomic Policy : Does It Matter for Growth? The Role of Volatility

Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling fo...

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Bibliographic Details
Main Authors:	Fatas, Antonio, Mihov, Ilian
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2017
Subjects:	ABSOLUTE VALUE AGGREGATE LEVEL AMERICAN ECONOMIC REVIEW AVERAGE GROWTH BUDGET DEFICITS BUSINESS CYCLE BUSINESS CYCLES CASE STUDIES CENTRAL BANK CENTRAL BANKS COUNTRY CASE CREDIT CONSTRAINTS CROSS COUNTRY DATA AVAILABILITY DEMOCRACY DEPENDENT VARIABLE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT PRACTITIONERS DEVELOPMENT RESEARCH DISCRETIONARY FISCAL POLICY ECONOMETRIC ANALYSIS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC FLUCTUATIONS ECONOMIC GROWTH ECONOMIC MANAGEMENT ECONOMIC PERFORMANCE ECONOMIC POWER ECONOMIC RESEARCH ECONOMIC STABILITY ECONOMIC STUDIES EFFECTS OF VOLATILITY EMERGING MARKET EMERGING MARKET BUSINESS EMERGING MARKETS EMPIRICAL EVIDENCE EMPIRICAL LITERATURE EMPIRICAL RESULTS EMPIRICAL WORK ENVIRONMENTAL BENEFITS EXCHANGE RATE POLICY EXCHANGE RATES EXPLANATORY VARIABLES EXPORT DIVERSIFICATION EXTERNAL SHOCKS FINANCIAL DEVELOPMENT FISCAL POLICIES FISCAL POLICY FUTURE RESEARCH GDP GDP DEFLATOR GDP PER CAPITA GOVERNMENT CONSUMPTION GOVERNMENT DEBT GOVERNMENT SPENDING GROWTH EFFECTS GROWTH LITERATURE GROWTH MODEL GROWTH MODELS GROWTH PERFORMANCE GROWTH RATE GROWTH RATES GROWTH REGRESSIONS GROWTH THEORY HIGH INFLATION HIGH VOLATILITY HIGHER VOLATILITY HUMAN CAPITAL INCOME INCOMPLETE MARKETS INDUSTRIAL ECONOMIES INDUSTRIALIZED COUNTRIES INFLATION INFLATION RATES INSTITUTIONAL ENVIRONMENT INSTRUMENTAL VARIABLES INTEREST RATE INTEREST RATES INTERNATIONAL FINANCE LABOR SUPPLY LIBERALIZATION LINK BETWEEN VOLATILITY LIQUIDITY LONG-TERM GROWTH LOW-INCOME COUNTRIES MACROECONOMIC MODELS MACROECONOMIC OUTCOMES MACROECONOMIC PERFORMANCE MACROECONOMIC POLICIES MACROECONOMIC POLICY MACROECONOMIC STABILIZATION MACROECONOMIC VOLATILITY MACROECONOMICS MARGINAL EFFECT MEAN INCOME MEASURE OF VOLATILITY MONETARY ECONOMICS MONETARY POLICY NATURAL RATE OF UNEMPLOYMENT NATURAL RESOURCES NEGATIVE EFFECT NEGATIVE IMPACT NEOCLASSICAL MODELS OUTPUT OUTPUT GAP OUTPUT GROWTH OUTPUT PER CAPITA OUTPUT VOLATILITY OVERVALUATION POINT ESTIMATES POLICY CHANGE POLICY CHANGES POLICY DETERMINANTS POLICY IMPLICATIONS POLICY INSTRUMENT POLICY MAKERS POLICY POINT OF VIEW POLICY RESEARCH POLICY STANCE POLICY UNCERTAINTY POLICY VARIABLES POLITICAL BUSINESS CYCLE POLITICAL ECONOMY POLITICAL ECONOMY OF REFORM POLITICAL INSTABILITY POLITICAL POWER POLITICAL SYSTEM POOR COUNTRIES POSITIVE EFFECTS POVERTY REDUCTION PRIMARY EDUCATION PRIVATE INFRASTRUCTURE PRIVATE INVESTMENT PRODUCTION FUNCTION PRODUCTIVITY GROWTH PUBLIC DEBT RAPID ECONOMIC GROWTH REAL EXCHANGE RATE REAL EXCHANGE RATES RECESSIONS RICH COUNTRIES RISK NEUTRAL RISK SHARING SCALE EFFECTS SIGNIFICANT EFFECT SIGNIFICANT IMPACT STANDARD DEVIATION STANDARD ERRORS TAX TAX BASE VARIABILITY TAX RATE TAX RATES TAXATION TOTAL FACTOR PRODUCTIVITY UTILITY FUNCTION VOLATILE ECONOMY VOLATILITY VOLATILITY OF INFLATION
Online Access:	http://documents.worldbank.org/curated/en/109371468328586374/Macroeconomic-policy-does-it-matter-for-growth-The-role-of-volatility http://hdl.handle.net/10986/28025

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Summary:	Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling for other factors. As an example, the significance of key economic policy variables such as inflation or government size disappears if we account for the quality of institutions. This paper looks at recent empirical research that questions the conclusion that macroeconomic policy does not matter for growth. By looking at the volatility of economic policy (whether it is fiscal policy or exchange rates), the authors find that policy is still a relevant and robust explanatory variable of cross country differences in economic growth. These results have strong policy implications. Improvements in the conduct of macroeconomic policy can have beneficial growth effects even if institutional reforms are not taking place. These results do not deny the importance of institutional reforms. By setting the right institutions one can ensure the proper conduct of macroeconomic policy without having to rely on the 'quality' of the decision maker.

Macroeconomic Policy : Does It Matter for Growth? The Role of Volatility

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