Business Cycles in the Eastern Caribbean Economies : The Role of Fiscal Policy and Interest Rates
This paper analyzes the business cycle characteristics of the economies of the Organization of Eastern Caribbean States using a model of a small open economy subject to interest rate and fiscal expenditure shocks and financial frictions. The paper...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/01/25833246/business-cycles-eastern-caribbean-economies-role-fiscal-policy-interest-rates http://hdl.handle.net/10986/23717 |
| Summary: | This paper analyzes the business cycle
characteristics of the economies of the Organization of
Eastern Caribbean States using a model of a small open
economy subject to interest rate and fiscal expenditure
shocks and financial frictions. The paper shows that
macroeconomic aggregates in this region are quite volatile,
with consumption exhibiting higher volatility than gross
domestic product. The analysis also finds that in these
economies real interest rates are highly volatile and
strongly countercyclical with gross domestic product and
other macroeconomic aggregates. Similarly, fiscal
expenditures show significant volatility, but are
pro-cyclical with gross domestic product. The results
suggest two major directions for designing policies to help
reduce the volatility experienced by the Organization of
Eastern Caribbean States economies. First, Organization of
Eastern Caribbean States countries should seek a greater
openness to international financial markets, which could
help them smooth out the effects of fundamental shocks, such
as shocks to technology and terms of trade, and shocks
associated with natural hazards. However, this removal of
international financial barriers needs to be accompanied by
improvements in domestic financial conditions, as this would
reduce the vulnerability of these economies to country risk
premium shocks. Second, the Organization of Eastern
Caribbean States region should try harder to move toward a
countercyclical fiscal policy stance, as this could help to
stabilize the domestic risk premium and cushion the negative
effects of interest rate shocks on economic activity, hence
reducing volatility. |
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