Publication: Taming Volatility: Fiscal Policy and Financial Development for Growth in the Eastern Caribbean
Loading...
Files in English
767 downloads
159 downloads
124 downloads
Date
2016-06
ISSN
Published
2016-06
Author(s)
Odawara, Rei
Editor(s)
Abstract
The report is structured in four chapters that outline the main sources of volatility in the region and suggest ways to mitigate the impacts of that volatility on growth. Chapter one presents stylized facts associated with the growth performance of the Eastern Caribbean over the last 40 years. It contrasts the growth performance of the OECS with the rest of the Latin America region and shows that the two groups of countries have shown significant heterogeneity over the business cycle. The chapter also highlights some of the factors that might be responsible for the volatility of growth in the OECS, including the region’s exposure to natural disasters, high debt, and adverse developments in the financial sector. Chapter two provides new evidence on output volatility and the cyclicality of fiscal policy in the OECS and discusses why countries are better off avoiding a pro-cyclical fiscal policy stance. Chapter three assesses the level of financial development in the region as well as the relationship between financial development, growth, and volatility. The chapter also explores critical policy options to strengthen financial development in the OECS. Chapter four assesses empirically the combined effects of terms of trade volatility, fiscal policy (pro) cyclicality, and financial development on growth in the OECS and other countries using two complementary modeling approaches. First, through an econometric model using panel data for 175 countries over the period 1980-2010. Second, by using impulse-response analysis based on a structural model of the business cycle in the OECS region.
Link to Data Set
Citation
“Odawara, Rei; Carneiro, Francisco Galrao. 2016. Taming Volatility: Fiscal Policy and Financial Development for Growth in the Eastern Caribbean. © World Bank. http://hdl.handle.net/10986/24925 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication New Evidence on the Cyclicality of Fiscal Policy(World Bank, Washington, DC, 2015-06)This paper presents new evidence on the patterns of cyclicality in the fiscal policy stance of developing and industrialized countries over a period of more than three decades covering 180 countries during 1980–2012. First, the paper considers issues of robustness in the choice of the proxy for fiscal cyclicality by using alternative filtering methods to check whether this influences the results and leads to any differences in a country’s reported within-period average, and across-period changes in fiscal stance. Second, a country-specific approach is used to split the sample into sub-periods based on a test for structural break in the series of real gross domestic product per capita. Third, the paper investigates the extent to which countries behave pro-cyclically or counter-cyclically in different phases of the business cycle. In line with earlier findings in the literature, the analysis confirms that there is a causal link running from stronger institutions to less pro-cyclical fiscal policy, even after controlling for the endogeneity of institutions and other determinants of fiscal policy.Publication The Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth(World Bank, Washington, DC, 2015-12)This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980–2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.Publication Revisiting the Evidence on the Cyclicality of Fiscal Policy across the World(World Bank, Washington, DC, 2016-10)A large and growing literature has argued that industrialized and developing countries behave very differently in relation to their fiscal policy stances over the business cycle. In this paper, the authors provide new evidence on the cyclicality of fiscal policy across industrialized and developing countries. The authors sample includes 180 countries, of which 134 are developing countries and 46 are high income countries over the period 1980-2012. The authors follow the methodology of Frankel et al. (2013) but at the same time introduce three innovations to the empirical approach. This paper is organized as follows : After Introduction, Section two discusses issues associated with the choice of filter to smooth the proxy variable for fiscal cyclicality while Section three estimates our own Graduating Class under different filtering methods and a country-specific approach to split the sample into two sub-periods. Section four presents an analysis of how the countries in our sample behave over the business cycle. Section five discusses our findings on the empirical determinants of fiscal cyclicality while Section six explores endogeneity issues. Section 7 presents concluding remarks confirming earlier findings in the literature on the causal link between institutional quality and a less pro-cyclical fiscal stance and suggesting policy directions that could be useful to countries interested in strengthening their fiscal positions and becoming better equipped to adopt counter-cyclical fiscal policiesPublication Fiscal Policy Procyclicality and Volatility in Commodity-Exporting Emerging and Developing Economies(Washington, DC: World Bank, 2025-01-14)Over the past few decades, fiscal policy has been about 30 percent more procyclical and about 40 percent more volatile in commodity-exporting emerging markets and developing economies (EMDEs) than in other EMDEs. Both procyclicality and volatility of fiscal policy—which share some underlying drivers—hurt economic growth because they amplify business cycles. Structural policies, including exchange rate flexibility and the easing of restrictions on international financial transactions, can help reduce both fiscal procyclicality and fiscal volatility. By adopting average advanced economy policies on exchange rate regimes, restrictions on cross-border financial flows, and the use of fiscal rules, commodity-exporting EMDEs can increase their gross domestic product per capita growth by about 1 percentage point every four to five years through the reduction in fiscal policy volatility. Such policies should be supported by sustainable, well-designed, and stability-oriented fiscal institutions that can help build buffers during commodity price booms to prepare for any subsequent slump in prices. A strong commitment to fiscal discipline is critical for these institutions to be effective in achieving their objectives.Publication Managing East Asia's Macroeconomic Volatility(2009-07-01)East Asia has experienced a dramatic decrease in output growth volatility over the past 20 years. This is good news, as output growth volatility affects poor households because of coping strategies that have long-term, harmful consequences, and the overall economy through its negative impact on economic growth. This paper investigates the factors behind this long decline in volatility, and derives lessons about ways to mitigate renewed upward pressure in face of the financial crisis. The authors show that if, on the one hand, high trade openness has sustained economic growth in the past several decades, on the other hand, it has made countries more vulnerable to external fluctuations. Although less frequent terms of trade shocks and more stable growth rates of trading partners have helped to reduce volatility in the past, the same external factors are now putting renewed pressure on volatility. The way forward seems therefore to be to counterbalance the external upward pressure on volatility by improving domestic factors. Elements under domestic control that can help countries deal with high volatility include more accountable institutions, better regulated financial markets, and more stable fiscal and monetary policies.
Users also downloaded
Showing related downloaded files
Publication World Development Report 2011(World Bank, 2011)The 2011 World development report looks across disciplines and experiences drawn from around the world to offer some ideas and practical recommendations on how to move beyond conflict and fragility and secure development. The key messages are important for all countries-low, middle, and high income-as well as for regional and global institutions: first, institutional legitimacy is the key to stability. When state institutions do not adequately protect citizens, guard against corruption, or provide access to justice; when markets do not provide job opportunities; or when communities have lost social cohesion-the likelihood of violent conflict increases. Second, investing in citizen security, justice, and jobs is essential to reducing violence. But there are major structural gaps in our collective capabilities to support these areas. Third, confronting this challenge effectively means that institutions need to change. International agencies and partners from other countries must adapt procedures so they can respond with agility and speed, a longer-term perspective, and greater staying power. Fourth, need to adopt a layered approach. Some problems can be addressed at the country level, but others need to be addressed at a regional level, such as developing markets that integrate insecure areas and pooling resources for building capacity Fifth, in adopting these approaches, need to be aware that the global landscape is changing. Regional institutions and middle income countries are playing a larger role. This means should pay more attention to south-south and south-north exchanges, and to the recent transition experiences of middle income countries.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.Publication Remarks to the Annual Meetings 2020 Development Committee(World Bank, Washington, DC, 2020-10-16)David Malpass, President of the World Bank Group, announced that the Board approved a fast track approach to emergency health support programs that now covers 111 countries. Most projects are well advanced, with average disbursement upward of 40 percent. The goal is to take broad, fast action early. The operational framework presented back in June has positioned the Bank to help countries address immediate health threats and social and economic impacts and maintain our focus on long-term development. The Bank is making good progress toward the 15-month target of 160 billion dollars in surge financing. Much of it is for the poorest countries and will take the form of grants or low-rate, long-maturity loans. IFC, through the Global Health Platform, will be providing financing to vaccine manufacturers to foster expanded production of COVID-19 vaccines in both part 1 and 2 countries, providing production is reserved for emerging markets. The Development Committee holds a unique place in the international architecture. It is the only global forum in which the Governments of developed countries and the Governments of developing countries, creditor countries and borrower countries, come together to discuss development and the ‘net transfer of resources to developing countries.’ The current International Financial Architecture system is skewed in favor of the rich and creditor countries. It is important that all voices are heard, so Malpass urged the Ministers of developing countries to use their voice and speak their minds today. Malpass urged consideration of how we can build a new approach to debt restructuring that allows for a fair relationship and balance between creditors and debtors. This will be critical in restoring growth in developing countries; and helping reverse the inequality.Publication Doing Business 2014 : Understanding Regulations for Small and Medium-Size Enterprises(Washington, DC: World Bank Group, 2013-10-28)Eleventh in a series of annual reports comparing business regulation in 185 economies, Doing Business 2014 measures regulations affecting 11 areas of everyday business activity: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting investors, Paying taxes, Trading across borders, Enforcing contracts, Closing a business, Employing workers. The report updates all indicators as of June 1, 2013, ranks economies on their overall “ease of doing business”, and analyzes reforms to business regulation – identifying which economies are strengthening their business environment the most. The Doing Business reports illustrate how reforms in business regulations are being used to analyze economic outcomes for domestic entrepreneurs and for the wider economy. Doing Business is a flagship product by the World Bank and IFC that garners worldwide attention on regulatory barriers to entrepreneurship. More than 60 economies use the Doing Business indicators to shape reform agendas and monitor improvements on the ground. In addition, the Doing Business data has generated over 870 articles in peer-reviewed academic journals since its inception.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.