Countercyclical Policy Research Articles

The paper presents the impact of counter-cyclical fiscal policy implemented during economic crunch in the economies of South America as far as short-term and long-term rates of employment are concerned. The reason behind this is that South America relies on the export of commodities and this aspect combined with political and fiscal instability provide the outcomes of such interventions challenging. The fiscal stimulus in the short term in terms of increased state spending and employment generation has been successful because it has led to the reduction of unemployment since it increases the demand and serves as a cushion to any decrease in the private sector. The employment multipliers in non-tradable are greatest and are bound to rise when prices of good commodities rise to augment the fiscal space. However, the long-term implications can be seen to have structural risks. Sustained reliance on government employment would choke in the investment in the private sector, labor markets and would cause inflationary pressure. Further, the debt accumulation, ineffective institutional capacity, and limited the sustainability of the employment undermine fiscal sustainability. This fact suggests that counter-cyclical policies can reduce unemployment in the short run, but is not likely to produce long-term benefits in terms of increased employment, unless it is accompanied by both structural reform and institutional reinforcement. Lastly, the paper brings out the trade-offs between the short-term stabilization and the long-term economic resilience in the counter-cyclical policies of South America.

Recent literature (Gadelha & Divino, 2021; Kakar et al., 2020) [17, 19] demonstrates a robust link between institutional quality and monetary policy cyclicality, with emerging economies often exhibiting procyclical biases. This paper investigates this phenomenon in the unique case of Morocco, where institutional deficiencies—particularly in education, healthcare, and justice (CSMD, 2021)—make it a compelling laboratory to test these hypotheses. Using a Smooth Transition Regression (STR) model following Teräsvirta's (1994) [31] methodology, this study reveals three key findings: (i) the Moroccan Taylor rule exhibits significant nonlinearity, confirming existing research on heterogeneous monetary regimes; (ii) monetary policy remains structurally procyclical during 1984-2019, consistent with emerging market trends; and (iii) institutional quality emerges as a decisive factor (p-value < 0.05). Beyond its methodological contribution (first STR application to Morocco), this research informs debates on institutional reforms needed to achieve countercyclical policies. Results suggest a minimum governance threshold is required to reverse cyclicality, opening avenues for comparative North African studies.

Bankruptcy is one of the options available for debtors to resolve financial difficulties when the debtor is unable or is estimated to be unable to pay the obligations owed to the debtor's creditors which are due and billed. Everyone seeking justice must follow certain procedures, including bankruptcy and suspension of debt repayment obligations. The application for bankruptcy and suspension of debt payment obligations is the first step, followed by a decision to declare bankruptcy and suspension of debt payment obligations, as well as all legal remedies. OJK has issued a Credit Restructuring Policy based on Financial Services Authority Regulation Number 11/POJK.03/2020 concerning Economic Stimulus as a Countercyclical Policy for the Impact of the 2019 Coronavirus. This procedure will require debtor restructuring to avoid bankruptcy, either through debt restructuring or corporate restructuring. The purpose of this study is to obtain an overview of the implementation of restructuring in the process of bankruptcy and payment delays, as well as a reference for maximizing debtor restructuring plans. This study finds that debt restructuring and deferred payments are mostly debt restructuring and begin with a settlement plan. Rescheduling consists of selling assets, acquiring new equity, and engaging in debt-to-equity swaps. When the debtor arranges a plan restructuring, fixation begins. Some of the main causes are debtors' misunderstandings about how to use the restructuring plan. Furthermore, in other situations, the implementation of the restructuring may fail due to the debtor's inability to manage the business and its obligations.

Objective: This paper proposes and empirically tests a novel hypothesis: that the U.S. government responds to volatility in wheat prices. Theoretical Framework: The hypothesis that the government controls price volatility, as presented in Crain and Lee (1996) and Yang, Haigh, and Leatham (2001), holds only for countries with closed economies or significant market power. In this paper, we propose a new hypothesis: that the government reacts to price volatility. We examine how government farm programs respond to price fluctuations in the wheat market. Method: Our dataset includes U.S. wheat spot prices from the United States Department of Agriculture and information on fourteen farm programs spanning the period from 1961 to 2014. We provide a detailed description of each program’s role and assess its respective volatility. To test the hypothesis that farm programs respond to price volatility, we employ Granger causality analysis. Additionally, we construct a reaction dummy variable to empirically evaluate the responsiveness of each individual program Results and Discussion: Our empirical findings suggest that the government does, in fact, respond to volatility in wheat prices. When wheat prices are relatively low, government outlays increase in response to price volatility, indicating more active intervention. Conversely, when wheat prices are high, government outlays remain largely unaffected, suggesting a more market-oriented approach with limited government involvement. Research Implications: Policymakers can leverage these findings to refine the timing and structure of future interventions, enhancing both their efficiency and responsiveness. Budget authorities can better anticipate and manage fluctuations in agricultural spending across different market scenarios. Furthermore, farmers and market participants may adjust their expectations and production strategies based on the perceived pattern of government intervention. The observed lack of response during high-price periods reinforces market discipline, encouraging producers to operate more efficiently and with reduced reliance on government support. Finally, the dual-response pattern identified in this study supports the development of countercyclical policy tools that activate automatically under adverse conditions. Originality/Value: This study contributes to the literature by proposing and empirically testing a novel hypothesis that U.S. agricultural programs respond not only to wheat price levels but specifically to price volatility. Unlike most existing studies that focus on government reactions to price trends, this work also highlights an asymmetric behavior in which the government intervenes primarily when prices are low and volatile, while allowing the market to operate freely during high-price periods. The relevance and value of this research are evidenced by its potential to improve the understanding of government intervention mechanisms in agricultural markets, particularly how policy responses are triggered by price volatility rather than just price levels. Additionally, the findings offer producers and market participants clearer expectations about government behavior, which can influence production decisions and risk management strategies.

Modern economic systems face unprecedented socioeconomic challenges, which make increasing systemic resilience and improving liquidity flow management particularly important. Traditional models (CAPM, VaR, GARCH) often fail to reflect real market fluctuations and extreme events. In the presented study, an innovative mathematical model has been developed, which is based on the interpretation of the Navier-Stokes equations and aims at the quantitative assessment, forecasting, and simulation analysis of liquidity flows and systemic risks. The main hypothesis of the study is that the adapted form of the Navier-Stokes equations in financial modeling allows us to accurately study the internal dynamics of the market, liquidity diffusion, the impact of external shocks, and structural tensions. The model integrates 13 macroeconomic and financial parameters, including liquidity velocity, market pressure, internal stress, beta coefficient, stochastic fluctuations, risk premiums, and contingency factors, all based on real statistical data and formally incorporated into the modified equation. The methodology is based on a mixed approach: econometric testing, Fourier analysis, stochastic simulations, and AI-algorithm tuning, which together provide dynamic testing, calibration, and forecasting capabilities of the model. Simulation-based sensitivity analysis is used, which assesses the impact of parameter changes on the financial balance. The proposed model is empirically validated using macroeconomic and financial data from Georgia for the period 2010–2024. The model is validated using empirical data such as Gross Domestic Product (GDP), inflation, the Gini index, Credit Default Swap (CDS) spreads, and Liquidity Coverage Ratio (LCR) metrics.The results indicate that the model effectively describes the dynamics of liquidity, systemic risks and extreme financial scenarios. The balancing of the model’s equations’ left and right sides is conducted under real and simulated conditions. When discrepancies occur, a dynamic balance term, represented as a time-varying residual force, ensures systemic adaptation. In addition, the cyclical components obtained by Fourier analysis are harmoniously related to economic cycles and increase the accuracy of the model’s predictions. The scientific significance of the study lies in the fact that it creates a mathematically balanced framework for a multifactorial analysis of the behavior of the financial system, which makes it possible not only to predict crises, but also to plan countercyclical policies and increase systemic stability. This model represents a significant scientific advance in the field of economic modeling and creates a real opportunity to increase the resilience of financial systems to socioeconomic fluctuations and systemic risks.

The purpose of this research is to investigate the economic volatility of North Macedonia over the period 1998-2023. The study employs an Autoregressive Distributed Lag (ARDL) model that intends to assess the dynamics of economic volatility over economic growth. Economic volatility is measured as the standard deviation of GDP growth over a rolling window. The empirical results reveal that government budget balance, private sector credit, current account balance, money supply, and economic volatility significantly influence GDP growth, though with varying lag structures and directions. Notably, economic volatility stands out as a critical variable, while it may temporarily correspond with higher growth, its lagged effects are profoundly negative, showing the destabilizing consequences of persistent fluctuations. To mitigate volatility, the government needs to promote sound institutional frameworks, counter-cyclical policies, and structural reforms that enhance resistance to shocks.

This paper revisits the potential output of the Kyrgyz Republic considering recent structural shifts and external shocks, including the pandemic and the regional conflict. Utilizing a suite of methodologies – production function, state-space models, and statistical filters – it estimates potential output growth at 5.3 percent, up from around 4.4 percent prior to the pandemic. This increase is primarily driven by capital accumulation and labor force expansion. However, total factor productivity remains below historical averages. The persistently positive output gap points to overheating risks, underscoring the need for counter-cyclical policies and structural reforms.

This study examines how institutional quality (measured by the ICRG and POLCON indices) impacts the effectiveness of monetary and fiscal policies in Peru between 2005 and 2020. Specifically, a Taylor-style monetary policy rule and a fiscal reaction function are jointly estimated, each augmented with an interaction between the output gap and the institutional quality measures. Moreover, the models incorporate inflation, exchange rate, and terms-of-trade gaps, alongside instrument lags and dummy variables. Monthly financial data come from the Central Reserve Bank of Peru, whereas ICRG and POLCON are annualized via Ecotrim. The equations are then estimated using the Generalized Method of Moments (GMM) to address potential endogeneity through lagged instruments. As a result, critical quality thresholds emerge (POLCON ≈ 0.86 for both rules, ICRG ≈ 72 in the Taylor framework, and ICRG ≈ 68 in the fiscal model) that distinguish procyclical from countercyclical regimes. Additionally, the interest-rate gap exhibits high persistence (exceeding 0.93), while the real-expenditure gap persists around 0.30. Furthermore, inflation, exchange rate, and terms-of-trade gaps significantly influence both policy instruments, and dummy variables capture the structural impacts of banking and fiscal reforms. In conclusion, strong institutional quality enhances the autonomy and credibility of both the Central Bank and fiscal authorities, thereby enabling countercyclical measures that stabilize economic fluctuations; conversely, periods of weak institutional frameworks in the 1980s and 1990s constrained such policy effectiveness. Finally, deepening institutional independence, transparency, and oversight is recommended to strengthen countercyclical policy, reduce macroeconomic volatility, and bolster economic agents’ confidence.

This paper investigates the short- and medium-term economic impacts of natural disasters, focusing on Pacific Island Countries (PICs) and using global high-frequency nightlight data in addition to macroeconomic data. In this paper, we identify significant short-term effects on growth following natural disasters, which are exacerbated by high public debt and heightened climate vulnerability. Although the negative impacts generally diminish within a year for most countries, PICs face disproportionately larger and rising short-term disruptions (-1.4 percent of annual potential growth) and persistent medium-term consequences. Further analysis of PICs' fiscal, external, and real sectors following severe disasters using annual economic data reveals that weaker fiscal positions, partly driven by reduced output, may lead to an upward trend in public debt, and increased imports may deteriorate current account balances over the medium term. These findings underscore the need for robust counter-cyclical policies and proactive investments in climate resilience to mitigate the adverse effects of climate shocks and promote long-term economic stability

Geopolitical tensions and policy uncertainties tend to accentuate human misery. However, empirical accounts of their underlying nexus are scant in the literature, limiting the policy options for sustainable development. To circumvent this drawback, we verified the influence of geopolitical risks (GPR) and economic policy uncertainties (EPU) on poverty and income distributions in 17 emerging economies from 2010 to 2021. The estimates of the novel smoothed instrumental-variable quantile regression unveiled the following empirical insights. GPR and EPU are strong determinants of human miseries in these emerging economies. While GPR had more profound effects on the income disparities, EPU influenced poverty more profoundly. Thus, policymakers should focus more on GPR to reduce the income inequalities, while EPU should be the focal point for poverty reductions. The prevailing quality of institutions and financial inclusiveness in these countries failed to engender substantial reductions in human miseries. Remarkably, human capacity building and the availability of ICT infrastructures reduced human miseries substantially. Therefore, we emphasize articulating country-specific countercyclical policy guidelines capable of insulating the macroeconomic spaces from global risk factors like GPR and EPU. Besides, the roles of strong institutions, human capacity building, inclusive finance, and ICT infrastructure cannot be overemphasized. By implementing these policy guidelines, human miseries would be eliminated for overall welfare optimization.

Abstract Industrial policies are widely used across the world. In practice, designing and implementing these policies is a complicated task. In this paper, we assess the long-term performance of different industrial policy instruments, which include production subsidies, investment subsidies, entry subsidies, and consolidation policies. To do so, we examine a recent industrial policy in China aiming to propel the country’s shipbuilding industry to the largest globally. Using firm-level data from 1998 to 2014 and a dynamic model of firm entry, exit, investment, and production, we find that (i) the policy boosted China’s domestic investment, entry, and international market share dramatically, but delivered low returns and led to fragmentation, idle capacity, as well as depressed world ship prices; (ii) the effectiveness of different policy instruments is mixed: production and investment subsidies can be justified by market share considerations, while entry subsidies are wasteful; (iii) counter-cyclical policies, firm-targeting, and shortening the intervention horizon can substantially reduce distortions. Our results highlight the critical role of firm heterogeneity, business cycles, and firms’ cost structure in policy design. Finally, when exploring potential rationales, we find support for nonclassical considerations, such as reducing freight rates to boost Chinese trade.

Since its entry into the commodities market in 1968, Ecuadorian shrimp has had a significant impact on both the domestic market and international trade, consolidating itself as an important source of foreign currency for the country. The objective of this study focuses on analyzing the influence of the economic policies implemented in Ecuador to promote the growth of shrimp production and export, comparing them with the policies applied in the main leading countries in the sector, such as India, Thailand, Indonesia and Vietnam. Using a quantitative approach, data were collected and analyzed between the years 2019 and 2023 through descriptive statistics and documentary review. The results show that Ecuador has led the production and export of shrimp through countercyclical policies and the resilience of the sector, driven mainly by strategies from the business sector. The conclusions highlight that, although there are tax benefits and trade agreements, the success of the country's shrimp production depends largely on private initiative. This suggests the need for greater government support in R&D and security to further strengthen the sector.

Micro, Small and Medium Enterprises (MSMEs) are a fundamental part of economy as a source of employment and suppliers of goods and services. However, they do not have the same opportunities to access financing services as large firms. In this sense, Development Bank is responsible for supporting them. The aim of this research is to analyze the support of the Development Bank to MSMEs in Mexico and locally, during the economic crisis derived from the COVID-19 pandemic (2019-2021). The methodology employed in this study was qualitative, longitudinal, documentary and explanatory, data were collected through documentary and field research. This study begins with the definition of Development Bank and its the historical context in Mexico. Subsequently, the situation of MSMEs during the pandemic is analyzed, furthermore, the participation of the Development Bank with its countercyclical policy in the country and, moreover, the effect of this crisis on the smaller enterprises in a municipality in the southeast of Mexico. The results indicate that companies know the commercial bank more than the Development Bank. Additionally, services such as factoring and leasing are not used by micro and small enterprises, despite the benefits they provide for financing working capital and the acquisition of fixed asset. It is concluded that the intervention of the Development Bank in the credit market is crucial to address the failures associated with the asymmetry of information presented by MSMEs.

ABSTRACTThe inadequacy of global liquidity provision and the unequal distribution of its benefits stem from a fundamental distortion: the exercise of market power by the two largest issuers of international currencies. The United States and Europe jointly provide the currencies used for 79% of global reserves and 91% of trade invoicing, forming a duopoly in the means of payment used by the world economy. The exercise of this market power allows them to capture the bulk of seigniorage rents associated with the provision of global liquidity, while constraining developing countries' growth and limiting the scope of global countercyclical policies. This paper proposes aligning the issuance of special drawing rights (SDRs) with the growth of global reserve demand, as mandated by Article VIII (§7) of the International Monetary Fund's Articles of Agreement. This approach offers a politically feasible path to democratize global liquidity provision and provide developing countries with access to financing currently monopolized by advanced economies.

The success of fiscal consolidation in India highlights the importance of this approach for sustainable improvement of government finances leveraging revenue and expenditure reforms and debt-mix adjustment process. The study investigates the intricacies of policy consolidation in India with focus on the underlying structural, macroeconomic and institutional dimensions. The research findings listed several hurdles such as fiscal discipline, budget deficits, public debt, and space for productive public investments. The authors emphasize the need to find the right equilibrium between strengthening investor confidence, aiding in long-term economic growth, curtailing fiscal imbalances, and stimulating broad-based growth within the context of fiscal sustainability. A paper examining the policy challenges around improving fiscal balances, the paper assesses ways to reducing deficits, stabilising debt-to-GDP ratios and achieving fiscal sustainability. It discusses challenges in achieving macro stability, efficiency in the use of resources, sustainable debt levels and economic sustainability, in the Indian economic environment. In addition, the research highlights how important it is to have an agile policy-making capacity to respond to economic challenges and deploy counter-cyclical policies that help to facilitate economic recovery and build resilience. The narrative in India thus suggests that fiscal consolidation, although necessary for fiscal discipline and economic stability — and a precursor for sustainable growth — is difficult to achieve and needs the benefit of doubt to protect the health and immunity of the Indian economy. KEY WORDS: Fiscal consolidation, structural , institutional, economic policy.

Introduction. The relevance is due to the fact that very little attention is paid to this topic in domestic papers despite the importance of reserving budget funds as an instrument of countercyclical policy and sustainability of regional development. The purpose of the study is to identify the peculiarities of reserve funds regulation in the constituent entities of the Russian Federation, which will allow a better understanding of the motivation and incentives of the authorities and their risk management activities. Materials and Methods. With the help of general scientific methods the analysis of regional laws on reserve fund and budget process and profile governmental resolutions for each subject of the Russian Federation was carried out, the original database on the main features of reserve funds at the regional level in Russia was created. This made it possible to systematize disparate information on various aspects of budget reserves in Russian regions, highlight common features and peculiarities – a step towards improving the institution of reserving funds to ensure regional financial stability. Results. The main features and differences between the reserve fund of the subject of the Russian Federation as a public legal entity and the reserve fund (funds) of the executive authority of the subject are identified. It has been established that the reserve fund of the subject of the Russian Federation as a public legal entity is provided for by legislation in not more than half of the regions of the Russian Federation, while the reserve fund of the executive authority operates in every subject. The sources of the funds are, as a rule, a sharp increase in tax and non-tax revenues during the year and the balance on accounts at the beginning of the year. Areas of expenditures from the fund are usually limited and universal, but depending on the conditions of a particular region they can be diverse. Discussion and Conclusion. The reserve fund of the subject of the Russian Federation remains an unpopular instrument. Unlike the reserve fund of the executive authority, its formation is not necessary, and there is no and spending of funds in the regions. The practical implication consists in the possibility of supplementing the measures of the federal policy of financial stability, as well as in the use of the presented results at the level of a regional administration regarding the experience of other regions in terms of regulation and the practice of formation and of reserve funds.

Abstract This study estimated the fiscal reaction function to evaluate the sustainability of fiscal policy in Algeria from 1990 Q1 to 2022 using a nonlinear ARDL model. The results indicate that high debt levels adversely affect the budget balance during positive shocks, highlighting the need for effective debt management. The negative impact of the spending gap during downturns reflects Algeria’s reliance on government spending and the drawbacks of pro-cyclical fiscal policies. The output gap’s consistent positive effect on the budget balance suggests effective fiscal management. Additionally, oil price shocks, trade openness, and demographic changes all play significant roles in influencing the budget balance. Overall, the study reveals that insufficient responses to primary budget balance shocks weaken fiscal sustainability, emphasizing the need for improved debt management, counter-cyclical policies, economic diversification, and strategic fiscal adjustments to enhance financial stability in Algeria.

Purpose. This study examines fiscal rules as an instrument for ensuring economic stability and fiscal sovereignty in European countries, considering challenges related to their effectiveness, compliance, and impact on debt sustainability. Methodology of research. The study employs a comprehensive approach that includes the abstract and logical method for analysing the theoretical foundations of fiscal rules, the comparative analysis method to assess the impact of fiscal constraints on macroeconomic stability in different European countries, and the graphical method for visualizing key trends in debt sustainability and budgetary discipline. Findings. It has been established that fiscal rules play a crucial role in maintaining financial stability by preventing excessive debt accumulation and reinforcing budgetary discipline. The analysis of European experience highlights the advantages of strict fiscal constraints implemented in Germany, Poland, and the Netherlands, as well as the difficulties associated with their enforcement in highly indebted countries such as Italy, France and Spain. The study identifies the pro-cyclicality of traditional fiscal rules, which restricts governments’ ability to implement counter-cyclical policies. The introduction of a new fiscal constraints model in the EU, based on net expenditure control and debt sustainability analysis, addresses these challenges; however, its effectiveness remains a subject of debate. Originality. The study expands the approach to analysing fiscal rules through the lens of fiscal sovereignty of states. It identifies key factors influencing the effectiveness of fiscal constraints in EU countries, particularly by examining their pro-cyclicality, impact on debt sustainability, and budgetary discipline. A new EU fiscal regulation model, based on net expenditure control and debt sustainability assessment, was explored and its potential advantages and risks for the economic stability of member states were determined. Practical value. The findings of this study can be applied to improve budget planning mechanisms and public finance control in both EU countries and Ukraine. The proposed conclusions on the effectiveness of different fiscal rule models can be considered in developing national budget policy strategies, particularly in times of crisis. The analysis of the adaptability of the new EU fiscal regulation system enables an assessment of its potential for enhancing macroeconomic stability and determining the optimal level of flexibility of fiscal norms. Key words: fiscal rules, debt sustainability, economic stability, budget deficit, fiscal sovereignty, European Union, public debt.

The article explores the global impact of the COVID-19 pandemic, highlighting its severe effects on health systems, economies, and poverty levels. With an estimated 6.9 million deaths worldwide and the deepest recession since World War II, the pandemic had diverse regional impacts. South Asia, for example, experienced varying degrees of health and economic challenges; India faced over 500,000 deaths and a sharp economic downturn, while other nations in the region were less severely affected. The pandemic’s relatively brief duration, aided by global responses like lockdowns, social distancing, and rapid vaccine distribution, facilitated a quicker economic recovery, bolstered by unprecedented counter-cyclical policies. The article also examines South Asian case studies, including regional trade integration, the economic benefits of vaccination, and the socio-economic impacts on women in Bangladesh. It further discusses Pakistan’s response, Sri Lanka’s populist policies, and Indonesia’s monetary policy adjustments, offering valuable lessons for managing global health crises and economic downturns.

PurposeThis study aims to investigate the dynamics between exogenous shocks, financial stress and economic performance in the USA from January 1995 to August 2023.Design/methodology/approachGranger-causality tests and impulse response analyses are used to examine causal relationships and dynamic responses among crude oil prices, real M2 money supply, financial stress and key economic indicators.FindingsThis study reveals a significant correlation between elevated financial stress and reduced real output, along with disruptions in the labor market, potentially leading to economic recessionary trends. Failure to address these challenges could perpetuate labor market difficulties, weaken capital accumulation within the loanable funds market and ultimately hinder long-term economic growth prospects in the USA.Practical implicationsThis study offers insights for policymakers to mitigate financial stress. Recommendations include enhancing financial surveillance, strengthening regulatory frameworks, promoting economic diversification and implementing countercyclical policies to stabilize the economy and support labor markets. In addition, proactive monitoring of financial stress indicators can serve as early warning signals, aiding in timely interventions and effective risk management strategies.Originality/valueThis research provides a comprehensive analysis of how the financial stress index (FSI) mediates the effects of external shocks on the US economy, addressing a gap in existing literature. The integration of the FSI into the analysis enhances the understanding of the transmission channels through which external shocks influence the economy.