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Debt Sustainability and Procyclical Fiscal Policies in Latin America

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  • Enrique Alberola

    ()

  • Manuel Montero

    ()

Abstract

The computation of structural primary balances for the nine main Latin American countries and the comparison of their changes with their cyclical position during the period 1981-2004 confirm that fiscal policy is procyclical in the region. From this evidence, the paper shows strong evidence that the fiscal behavior is closely linked to the financial vulnerability position of the economies and, in particular, to the perception on the sustainability of public debt. The current threshold balance, defined as the primary balance that would render the debt stable under the existing economic and financial conditions, is used as our gauge for measuring debt sustainability concerns at each point in time. The empirical analysis reveals that fiscal stance tightens when the perceptions of debt sustainability worsen, that the impact is stronger the less sustainable debt is perceived, and that when controlling for these effects fiscal policy loses its procyclical stance. The results are robust to different specifications and estimation methods.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2006)
Issue (Month): ()
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Handle: RePEc:col:000425:008644

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Keywords: procyclical fiscal policy; debt sustainability;

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Cited by:
  1. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," IMF Working Papers, International Monetary Fund 14/45, International Monetary Fund.
  2. Ugo Panizza & Dany Jaimovich, 2007. "Prociclicalidad o Causalidad Reversa?," Research Department Publications, Inter-American Development Bank, Research Department 4509, Inter-American Development Bank, Research Department.
  3. Sophia Gollwitzer & Eteri Kvintradze & Tej Prakash & Luis-Felipe Zanna & Era Dabla-Norris & Richard Allen & Irene Yackovlev & Victor Duarte Lledo, 2010. "Budget Institutions and Fiscal Performance in Low-Income Countries," IMF Working Papers, International Monetary Fund 10/80, International Monetary Fund.
  4. Ignacio Lozano & Jorge Toro, . "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia, Banco de la Republica de Colombia 434, Banco de la Republica de Colombia.
  5. Juliana Dutra Araujo, 2009. "Fiscal Cycles in the Caribbean," IMF Working Papers, International Monetary Fund 09/158, International Monetary Fund.
  6. Alberola, Enrique & Molina, Luis & Navia, Daniel, 2007. "Say you fix, enjoy and relax. The deleterious effect of peg announcements on fiscal discipline in emerging markets," Emerging Markets Review, Elsevier, Elsevier, vol. 8(4), pages 328-338, December.
  7. Jeromin Zettelmeyer & Ivanna Vladkova Hollar, 2008. "Fiscal Positions in Latin America," IMF Working Papers, International Monetary Fund 08/137, International Monetary Fund.
  8. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications, Inter-American Development Bank, Research Department 4508, Inter-American Development Bank, Research Department.
  9. Mauricio Villafuerte & Pablo López-Murphy & Rolando Ossowski, 2011. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resources Exporters in Latin America and the Caribbean ," Working Papers Central Bank of Chile, Central Bank of Chile 609, Central Bank of Chile.
  10. Irene Yackovlev & Victor Duarte Lledo & Lucie Gadenne, 2009. "Cyclical Patterns of Government Expenditures in Sub-Saharan Africa," IMF Working Papers, International Monetary Fund 09/274, International Monetary Fund.
  11. Sergey Vlasov, 2011. "Russian Fiscal Framework Past, Present and Future.Do we Need a Change?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(64), pages 35-81, October -.
  12. Juan Carlos Berganza, 2011. "Fiscal rules in Latin America: a survey," Banco de Espa�a Occasional Papers, Banco de Espa�a 1108, Banco de Espa�a.

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