Influencing Factors of Macroeconomic Stability Across Income Groups

Abstract

This study empirically investigates the factors affecting macroeconomic stability across 79 countries spanning low, lower-middle, upper-middle, and high-income groups, using data from 2000 to 2023. A Macroeconomic Stability Index was constructed using a z-score method combining inflation rate, inflation volatility, government budget balance, and current account balance. Econometric analysis employed Pesaran CD, CIPS unit root, and Westerlund cointegration tests. Long-run coefficients for the low-, lower-middle-, and upper-middle-income groups were estimated using CCEMG, whereas the high-income group was examined using a stationary short-run FE-DK model. Independent variables included per capita income, trade openness, natural resource rents, financial development, institutional quality (control of corruption and government effectiveness), and public debt. The results indicate income-group-specific associations with macroeconomic stability. In the long run, trade openness is negatively associated with MSI in the upper-middle-income group, while public debt has a negative association in the lower-middle-income group. Given the small low-income sample and the variation across specifications, we treat the negative FD and INST coefficients as exploratory. In the high-income short-run model, public debt is negatively associated with MSI, while financial development displays a weaker negative association. In the short-run pooled interaction model, changes in natural resource rents are positively associated with MSI in the lower-middle-income group at the 10% level and in the upper-middle- and high-income groups at the 1% level. Coefficient equality across income groups is rejected at the 10% level (p = 0.058), whereas the long-run natural-resource-rent coefficients remain statistically insignificant. System-GMM primarily confirms strong MSI persistence. Taken together, the results provide no general evidence of a resource curse or of a stabilizing role for public debt across income groups. Policy implications should therefore be considered separately for each income group.