The literature has argued that developing countries are unable to adopt counter-cyclical
monetary and scal policies due to nancial imperfections and unfavorable political-economy
conditions. Using a world sample of 115 industrial and developing countries for 1984-2008,
we nd that the level of institutional quality plays a key role in countries’ ability to implement
counter-cyclical macroeconomic policies. The results show that countries with strong
(weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, re
ected in extended
monetary policy and scal policy rules. The threshold level of institutional quality
at which monetary and scal policies are a-cyclical is found to be similar.