Counter-cyclical Interventions Research Articles

The Role of Public Development Banks During the Pandemic: Impact Evaluation of BICE's Innovative Credit Response

ABSTRACT The global COVID-19 pandemic triggered a renewed impetus for the countercyclical role of development banks, marked by widespread adoption of diverse instruments to mitigate its impact. Argentina's development bank (BICE, Banco de Inversión y Comercio Exterior, specialized in loan for long term investment, responded to the 2020 health and economic crises implementing a working capital loan program. Amidst a lack of substantial evidence on the efficacy of similar counter-cyclical interventions, we employed a quasi-experimental methodology, incorporating Propensity Score Matching (PSM) and Fixed Effects (FE) estimations, to evaluate the program's impact. Our results demonstrate that firms benefiting from the loan maintained employment levels, in stark contrast to a nearly 6 per cent decrease for those without it. The program effectively mitigated the employment impact of the transient shock. Robustness checks, along with falsification tests, bolster our identification strategy. Complementary findings emphasize that the program's success lies in providing credit during adverse conditions, when private sector credit contracts. This insight, rather than the exceptional terms of the credit, offers a crucial lesson for the future.

Growth at risk: Boundary walkers, stylized facts and the legitimacy of countercyclical interventions

Post-crisis, central banks were encouraged to intervene against the cyclical build up of systemic risks in the financial system, a mandate which contravened previous conceptions of the state-economy boundary. This paper traces how central bank economists forged an analytical apparatus that could guide and legitimize such central bank interventions, detailing how their work involved forging new connections between actors within the boundary zone between the academic and the bureaucratic fields. Acting as ‘economists in the wild’, I show how these actors were able to establish ‘stylized facts’ about the boom-and-bust cycles of financial markets. Holding a foot both within the academic and the bureaucratic fields, such boundary walkers skilfully leveraged central bank resources to enrol allies in the field of academic economics to decisively shift the discursive representation of finance as cyclical, in turn legitimating ambitious central bank interventions into the functioning of the economy.

What happens when voting rules change? the case of New Zealand

This paper examines the impact of New Zealand’s 1996 adoption of a mixed member proportional (MMP) voting scheme on representation in the legislature, voter turnout, vote volatility and the likelihood of an incumbent party winning re-election. I then consider whether MMP has had any negative consequences for the effectiveness of government policy in relation to fiscal accountability and countercyclical intervention. The data used in the analysis begins from the formation of the party system in New Zealand (in 1890) and extends through the adoption of MMP to the pre-pandemic present (2017). The data set covers 42 elections: 34 before 1996 and 8 after.

The open-endedness of macroprudential policy. Endogenous risks as an obstacle to countercyclical financial regulation

AbstractAfter the global financial crisis of 2007–9, policymakers hailed macroprudential policy as the solution to financial markets’ boom-bust patterns. Financial regulations would have to operate countercyclically, increasing in stringency during a boom while becoming lenient in a bust. Simultaneously, the procyclical effects of pre-crisis rules would have to be eliminated. Actual reforms, however, do not live up to these high hopes. In addition to the countercyclical policy framework's limited scope and ambition, its open-endedness is particularly striking. As policymakers have not specified when supervisors should (de)activate what instruments and how firms should measure risk, there is an inbuilt indeterminacy at macroprudential policy's core. I argue that obstacles inherent to the nature of systemic risk are key to understanding this policy outcome. As the financial system is reflexive, adaptive, and complex, there are hard limits to supervisors’ ability to “read” the financial cycle. Furthermore, as macroprudential policy itself becomes “part of financial markets,” countercyclical interventions may have systemically significant unintended consequences. This article empirically shows how policymakers at the global and EU level, confronted with these measurement and mitigation problems, ultimately opted for a limited and open-ended policy framework.

Cyclical versus Structural Sustainability of Homeownership: Is Counter-cyclical Intervention in Housing Markets Enough?

The economic and housing market difficulties that emerged as a result of the recent global financial crisis (GFC) have encouraged a focus on the cyclical sustainability of homeownership. As a result, there has been inadequate attention paid to the impact of increased real household incomes and wealth on the structural sustainability of a housing system built on homeownership as the dominant tenure. This paper argues that, where housing supply is relatively inelastic in the long run, underlying demand pressures may keep house prices on a path which continues to diverge from household incomes. This will add to borrowing constraints already faced by aspiring first homeowners with low and moderate incomes and with limited wealth. If financial institutions tighten lending standards in response to the GFC, households with limited equity and limited capacity to pay will find it even more difficult to gain access to finance than has been the case in the past. This raises the question of whether homeownership can be sustained at its current levels. The paper uses outcomes in Australia to illustrate the points made and suggests that other countries, such as the UK, may well be about to follow the same path.

Countercyclical policy for Africa: institutional and economic feasibility

In August 2009, the Freetown Declaration by the African finance ministers committed their governments to 'implement fiscal stimulus measures' to counter the effects of the international financial crisis. This paper analyses the institutional and economic feasibility of realising this commitment. It considers the availability of policy instruments and the institutions to support them for countercyclical intervention in the sub-Saharan countries. The paper proposes a fiscal stimulus consistent with those institutions and constrains. In very few countries do there exist the institutions for the implementation of monetary policy. About one third of the countries are members of regional common currency institutions that eliminate the exchange rate and national monetary policy as policy tools. Within these constraints, for a majority of the countries, the fiscal expansion could be financed domestically, while other countries governments would require external funding. For about a fifth of the countries would a stimulus not be appropriate.

Consumer sentiment and countercyclical fiscal policies

We re‐explore the consequences of some popular countercyclical intervention rules in a simple Keynesian‐type macroeconomic model in which the dynamics of consumer sentiment and business cycles are intertwined. We find that fiscal policy does not only have a direct effect on national income via the well‐known Keynesian multiplier process but also an indirect effect by affecting consumer sentiment. The good news is that the indirect effect may amplify the direct effect and therefore increases a policy‐maker’s impact on national income. However, the bad news is that due to the interactions between the business cycle and the evolution of consumer sentiment, the stabilization of national income is an intricate matter.

Tourism demand for Italy and the business cycle

This study provides a strategy for modelling the effect of the business cycle on tourism demand under the rationale that tourism cycles are heavily influenced by lagged effects of the overall business cycle. Using quarterly data on overnight stays in Italian hotels, both domestic and inbound between 1985 and 2004, we adopt a structural time series approach to evaluate two alternative models, the first with a latent cycle component (LCC) and the second based on specific economic explanatory variables (XCV). The two models are compared in terms of explanatory power, best-fit, residual diagnostics and forecasting ability. The results show similar performances. The policy implication is that the XCV model can be used for calibrating countercyclical interventions in tourism policy.

Consumer sentiment and business cycles: a Neimark–Sacker bifurcation scenario

We seek to demonstrate that consumer sentiment may create fluctuations in economic activity. Our nonlinear discrete-time model possesses, for instance, a Neimark–Sacker bifurcation, after which a stable steady state is replaced by (quasi-)periodic motion. Countercyclical interventions to stabilize the economy may even produce complex (chaotic) business cycles.

A Simulation of Counter-cyclical Intervention: Lessons for Theory and Practice

This paper provides an Excel-based simulation of counter-cyclical interventions to highlight important issues surrounding the theory and practice of counter-cyclical government interventions. The simulation is very simple with deviations from full-employment output following an AR(1) process. This relatively atheoretical approach has several advantages. First, the simple model produces output patterns that are realistic without burdening students with complex IS-Phillips curve discussions; even principles students can access the discussion. Second, the assumed process is simple enough that it is possible to explicitly work out an optimal policy. Finally, by staying at an abstract level, the simulation is equally applicable to discussions of fiscal and monetary policy. After presenting the simulated economy, the paper discusses how student interaction with the simulation can motivate a wide array of issues taken up in the theoretical and empirical literature. First, through policy lags built into the simulation, students are lead to understand why economists have debated so energetically about the speed at which economies return to full-employment equilibria. Having introduced the idea of policy lags, the paper then points out the important role that many economists feel is played by automatic stabilizers. The paper extends this discussion even further by connecting the concerns resulting from policy lags with the structure of democracies because the form of government institutions (parliamentary vs. republican, unicameral vs. bicameral) affects the speed of response. Having acquainted themselves with the simulation, students are now prepared to consider what an optimal policy would look like. Most will initially make the size of their intervention roughly proportional to the size of the current deviation from full employment; if GDP is low hit the gas, if it is high hit the brakes. Students who aggressively pursue this policy inevitably produce cycles of increasing intensity. They have just discovered the political business cycle. The paper shows that the truly optimal policy responds to today's shock - not today's level. This is the inherent danger of turning economic policy over to elected officials and leads nicely to a discussion of central bank independence. Even once the optimal policy is identified, students will see that much economic variation is simply unavoidable. Moreover, even an optimal policy will sometimes exacerbate inflationary or recessionary episodes. After all, is only optimal on average; over short time frames bad luck may lead to bad outcomes. Students are encouraged to remember that we must resist the temptation to conclude that an intervention strategy has been a success or failure based on short time series. Ultimately, the antidote to such bad experiences may be found in better forecasting. The paper concludes by showing how we can calculate the degree to which the Fed's forecasting work may improve economic performance. Throughout, the paper includes references to accessible empirical papers which show how economists are currently researching these very issues. These can be used to supplement the discussion of the simulation or as resources for the energetic, advanced student.

Public Works as an Anti‐Poverty Program: An Overview of Cross‐Country Experience

Public works programs have been important counter-cyclical interventions in developed and developing countries. These programs were used in some Western countries during the depression years of the 1930s. More recently, several developing countries in Asia, Africa, and Latin America have adopted such programs in some form or another. In terms of person days of employment created, the programs in Bangladesh and India are perhaps the largest in the world. Employment in India's nationwide program (known as Jawahar Rojgar Yojna, or JRY) reached a billion workdays by 1995. I begin here with a brief discussion of the role of public works as a safety net and then present the available cross-country experience on various aspects of the program. The conclusions are then summarized.