Hence macroeconomic policies should play a stabilizing role in those
emerging market economies where institutions are stronger and economic
fundamentals are better--like in industrial economies. For example, Chile
and Malaysia adopted expansionary policies during the 2001-2003 period,
a period of cyclical weakness in these economies.
We argue that it is important to control for policy credibility when
assessing emerging country differences in the cyclical stance oftheirmacroeconomic
policies. The main goal of this paper is to test this proposition
by using the country risk spread on sovereign debt (a proxy for the lack of
policy credibility) as a principal determinant of the cyclicality of fiscal and