A test of the cost and benefits of policy intervention

Abstract

Using a keynesian model of regulated Brownian motion with an indogenous producer/investor term, Clark and Jokung (1998) showed that anticipated macroeconomic intervention can be effective in reducing fluctuations in economic activity. They also showed that the price of reduced volatility due to imperfect macroeconomic intervention is a reduction in levels of output. In this paper we use panel data for 64 countries over the period 1970-1995 to test these propositions We find a strong, highly significant negative relationship between per capita GDP and the level of intervention, a weaker but highly significant negative relationship between per capita GDP volatility and the level of intervention and very strong, highly significant positive relationship between per capita GDP and the volatility of per capita GDP. We conclude that the Clark-Jokung propositions are valid We get the same result in the case of emerging countries (Philippines, Indonesia, Malaysia and Thailand).