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Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: New Narrative Evidence from Latin America and the Caribbean

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  • YAN CARRIÈRE‐SWALLOW
  • ANTONIO C. DAVID
  • DANIEL LEIGH

Abstract

We estimate the effects of fiscal consolidation on economic activity based on a new narrative data set for 14 emerging economies in Latin America and the Caribbean (LAC). Following a Romer and Romer identification approach, we examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to the economic cycle. We find that a fiscal consolidation of 1% of GDP reduces real GDP by, on average, 0.9% in two years. The estimated effects are close to those we find for advanced economies based on a comparable narrative data set. We also find a strong “twin deficits” relation in LAC, with fiscal consolidation triggering an adjustment of the current account balance and depreciation of the real exchange rate that are more pronounced than in advanced economies.

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  • Yan Carrière‐Swallow & Antonio C. David & Daniel Leigh, 2021. "Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: New Narrative Evidence from Latin America and the Caribbean," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1313-1335, September.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:6:p:1313-1335
    DOI: 10.1111/jmcb.12784
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    Cited by:

    1. Lorenzo Carbonari & Alessio Farcomeni & Filippo Maurici & Giovanni Trovato, 2023. "On the output effect of fiscal consolidation plans: a causal analysis," Working Paper series 23-18, Rimini Centre for Economic Analysis.
    2. Yan Carrière-Swallow & José Marzluf, 2023. "Macrofinancial Causes of Optimism in Growth Forecasts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 509-537, June.
    3. Emilio Colombo & Davide Furceri & Pietro Pizzuto & Patrizio Tirelli, 2022. "Fiscal Multipliers and Informality," IMF Working Papers 2022/082, International Monetary Fund.
    4. Dabla-Norris, Era & Lima, Frederico, 2023. "Macroeconomic effects of tax rate and base changes: Evidence from fiscal consolidations," European Economic Review, Elsevier, vol. 153(C).
    5. Vybhavi Balasundharam & Olivier Basdevant & Dalmacio Benicio & Andrew Ceber & Yujin Kim & Luca Mazzone & Hoda Selim & Yongzheng Yang, 2023. "Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design," IMF Working Papers 2023/063, International Monetary Fund.
    6. Carmignani, Fabrizio, 2022. "The electoral fiscal multiplier," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 938-945.
    7. David, Antonio C. & Guajardo, Jaime & Yepez, Juan F., 2022. "The rewards of fiscal consolidations: Sovereign spreads and confidence effects," Journal of International Money and Finance, Elsevier, vol. 123(C).
    8. Dante Souza Cardoso & Laura Barbosa de Carvalho, 2023. "Effects of fiscal consolidation on income inequality: narrative evidence from South America," Empirical Economics, Springer, vol. 64(3), pages 1177-1218, March.
    9. Ardanaz, Martín & Cavallo, Eduardo A. & Izquierdo, Alejandro & Puig, Jorge, 2021. "The Output Effects of Fiscal Consolidations: Does Spending Composition Matter?," IDB Publications (Working Papers) 11857, Inter-American Development Bank.

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