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Debt sustainability and procyclical fical policies in Latin America

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Author Info
Enrique Alberola () (Banco de España)
José M. Montero () (Banco de España)

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Abstract

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

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0611e.pdf
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File Function: First version, May 2006
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0611.

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Length: 36 pages
Date of creation: May 2006
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Handle: RePEc:bde:wpaper:0611

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Related research
Keywords: procyclical fiscal policy; debt sustainability;

Other versions of this item:

Find related papers by JEL classification:
H6 - Public Economics - - National Budget, Deficit, and Debt
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F3 - International Economics - - International Finance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Banco de España Working Papers 0108, Banco de España. [Downloadable!]
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    Other versions:
  5. Paolo Manasse, 2006. "Procyclical Fiscal Policy: Shocks, Rules, and Institutions - A View From MARS," IMF Working Papers 06/27, International Monetary Fund. [Downloadable!]
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    Other versions:
  9. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  10. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
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    Other versions:
  12. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August. [Downloadable!] (restricted)
  13. Ernesto Talvi & Carlos A. Végh, 1998. "Fiscal Policy Sustainability: A Basic Framework," RES Working Papers 3070, Inter-American Development Bank, Research Department. [Downloadable!]
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  15. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," RES Working Papers 4032, Inter-American Development Bank, Research Department. [Downloadable!]
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  17. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the Business Cycle: a Modified Hodrick-Prescott Filter," Banco de España Working Papers 9912, Banco de España.
  18. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Banco de España Working Papers 0108, Banco de España. [Downloadable!]
  19. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December. [Downloadable!] (restricted)
    Other versions:
  20. Aaron Tornell & Philip R. Lane, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March. [Downloadable!] (restricted)
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    Other versions:
  24. Anderson, T. W. & Hsiao, Cheng., 1980. "Estimation of Dynamic Models with Error Components," Working Papers 336, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," BORRADORES DE ECONOMIA 002730, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Ignacio Lozano & Jorge Toro, . "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia. [Downloadable!]
  3. Juliana Dutra Araujo, 2009. "Fiscal Cycles in the Caribbean," IMF Working Papers 09/158, International Monetary Fund. [Downloadable!]
  4. Ivanna Vladkova Hollar & Jeromin Zettelmeyer, 2008. "Fiscal Positions in Latin America:Have They Really Improved?," IMF Working Papers 08/137, International Monetary Fund. [Downloadable!]
  5. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," RES Working Papers 4508, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Ugo Panizza & Dany Jaimovich, 2007. "Prociclicalidad o Causalidad Reversa?," RES Working Papers 4509, Inter-American Development Bank, Research Department. [Downloadable!]
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