Fatas, AntonioMihov, Ilian2017-08-282017-08-282009https://hdl.handle.net/10986/28025Recent 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.en-USCC BY 3.0 IGOABSOLUTE VALUEAGGREGATE LEVELAMERICAN ECONOMIC REVIEWAVERAGE GROWTHBUDGET DEFICITSBUSINESS CYCLEBUSINESS CYCLESCASE STUDIESCENTRAL BANKCENTRAL BANKSCOUNTRY CASECREDIT CONSTRAINTSCROSS COUNTRYDATA AVAILABILITYDEMOCRACYDEPENDENT VARIABLEDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDEVELOPMENT PRACTITIONERSDEVELOPMENT RESEARCHDISCRETIONARY FISCAL POLICYECONOMETRIC ANALYSISECONOMIC ACTIVITYECONOMIC DEVELOPMENTECONOMIC FLUCTUATIONSECONOMIC GROWTHECONOMIC MANAGEMENTECONOMIC PERFORMANCEECONOMIC POWERECONOMIC RESEARCHECONOMIC STABILITYECONOMIC STUDIESEFFECTS OF VOLATILITYEMERGING MARKETEMERGING MARKET BUSINESSEMERGING MARKETSEMPIRICAL EVIDENCEEMPIRICAL LITERATUREEMPIRICAL RESULTSEMPIRICAL WORKENVIRONMENTAL BENEFITSEXCHANGE RATE POLICYEXCHANGE RATESEXPLANATORY VARIABLESEXPORT DIVERSIFICATIONEXTERNAL SHOCKSFINANCIAL DEVELOPMENTFISCAL POLICIESFISCAL POLICYFUTURE RESEARCHGDPGDP DEFLATORGDP PER CAPITAGOVERNMENT CONSUMPTIONGOVERNMENT DEBTGOVERNMENT SPENDINGGROWTH EFFECTSGROWTH LITERATUREGROWTH MODELGROWTH MODELSGROWTH PERFORMANCEGROWTH RATEGROWTH RATESGROWTH REGRESSIONSGROWTH THEORYHIGH INFLATIONHIGH VOLATILITYHIGHER VOLATILITYHUMAN CAPITALINCOMEINCOMPLETE MARKETSINDUSTRIAL ECONOMIESINDUSTRIALIZED COUNTRIESINFLATIONINFLATION RATESINSTITUTIONAL ENVIRONMENTINSTRUMENTAL VARIABLESINTEREST RATEINTEREST RATESINTERNATIONAL FINANCELABOR SUPPLYLIBERALIZATIONLINK BETWEEN VOLATILITYLIQUIDITYLONG-TERM GROWTHLOW-INCOME COUNTRIESMACROECONOMIC MODELSMACROECONOMIC OUTCOMESMACROECONOMIC PERFORMANCEMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC STABILIZATIONMACROECONOMIC VOLATILITYMACROECONOMICSMARGINAL EFFECTMEAN INCOMEMEASURE OF VOLATILITYMONETARY ECONOMICSMONETARY POLICYNATURAL RATE OF UNEMPLOYMENTNATURAL RESOURCESNEGATIVE EFFECTNEGATIVE IMPACTNEOCLASSICAL MODELSOUTPUTOUTPUT GAPOUTPUT GROWTHOUTPUT PER CAPITAOUTPUT VOLATILITYOVERVALUATIONPOINT ESTIMATESPOLICY CHANGEPOLICY CHANGESPOLICY DETERMINANTSPOLICY IMPLICATIONSPOLICY INSTRUMENTPOLICY MAKERSPOLICY POINT OF VIEWPOLICY RESEARCHPOLICY STANCEPOLICY UNCERTAINTYPOLICY VARIABLESPOLITICAL BUSINESS CYCLEPOLITICAL ECONOMYPOLITICAL ECONOMY OF REFORMPOLITICAL INSTABILITYPOLITICAL POWERPOLITICAL SYSTEMPOOR COUNTRIESPOSITIVE EFFECTSPOVERTY REDUCTIONPRIMARY EDUCATIONPRIVATE INFRASTRUCTUREPRIVATE INVESTMENTPRODUCTION FUNCTIONPRODUCTIVITY GROWTHPUBLIC DEBTRAPID ECONOMIC GROWTHREAL EXCHANGE RATEREAL EXCHANGE RATESRECESSIONSRICH COUNTRIESRISK NEUTRALRISK SHARINGSCALE EFFECTSSIGNIFICANT EFFECTSIGNIFICANT IMPACTSTANDARD DEVIATIONSTANDARD ERRORSTAXTAX BASE VARIABILITYTAX RATETAX RATESTAXATIONTOTAL FACTOR PRODUCTIVITYUTILITY FUNCTIONVOLATILE ECONOMYVOLATILITYVOLATILITY OF INFLATIONWorking PaperWorld Bank10.1596/28025