Business Cycles in the Eastern Caribbean Economies : The Role of Fiscal Policy and Interest Rates

Carneiro, Francisco ; Hnatkovska, Viktoria

World Bank, Washington, DC

关键词: CREDIT MARKETS;    MONETARY POLICY;    HOLDING;    GOVERNMENT EXPENDITURES;    ECONOMIC GROWTH;   

DOI  :  10.1596/1813-9450-7545
RP-ID  :  WPS7545

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

This paper analyzes the business cyclecharacteristics of the economies of the Organization ofEastern Caribbean States using a model of a small openeconomy subject to interest rate and fiscal expenditureshocks and financial frictions. The paper shows thatmacroeconomic aggregates in this region are quite volatile,with consumption exhibiting higher volatility than grossdomestic product. The analysis also finds that in theseeconomies real interest rates are highly volatile andstrongly countercyclical with gross domestic product andother macroeconomic aggregates. Similarly, fiscalexpendituresshow significant volatility, but arepro-cyclical with gross domestic product. The resultssuggest two major directions for designing policies to helpreduce the volatility experienced by the Organization ofEastern Caribbean States economies. First, Organization ofEastern Caribbean States countries should seek a greateropenness to international financial markets, which couldhelp them smooth out the effects of fundamental shocks, suchas shocks to technology and terms of trade, and shocksassociated with natural hazards. However, this removal ofinternational financial barriers needs to be accompanied byimprovements in domestic financial conditions, as this wouldreduce the vulnerability of these economies to country riskpremium shocks. Second, the Organization of EasternCaribbean States region should try harder to move toward acountercyclical fiscal policy stance, as this could help tostabilize the domestic risk premium and cushion the negativeeffects of interest rate shocks on economic activity, hencereducing volatility.