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Fiscal Policy Throughout the Cycle: The Colombian Experience

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  • Ignacio Lozano

    ()

  • Jorge Toro

    ()

Abstract

This paper reviews the relationship between the business cycle and public finances in Colombia. The evidence shows that cyclical movements in output systematically affect the situation of public finances. Hence, the distinction between the cyclical and permanent (i.e. structural) components of the fiscal balance may allow fiscal authorities to determine the extent to which the fiscal stance in a particular year reflects their discretionary actions. Our findings indicate that the cyclical component of the central government balance in Colombia has in general been fairly small. For instance, during the recession and recovery period 1999-2003, the cyclical component attained, on average, -0,5% of the GDP which explained only 8% of the actual overall deficit. More recently in 2006, the cyclical component amounted to +0,8% of the GDP, equivalent to 17% of the actual fiscal imbalance Governments are not usually neutral during the business cycle. Ideally, they ought to practice a counter-cyclical fiscal policy to moderate the magnitude of output fluctuations. However, in emerging economies, counter-cyclical fiscal policies are inhibited by domestic and external factors, such as credit restrictions, quality of institutions, fiscal rules, corruption, voracity effect, etc. Using a standard approach we find that fiscal policy in Colombia has been pro-cyclical over the last 45 years or so, with the primary surplus falling (and the deficit rising) as a share of GDP by approximately 1/5th of a percentage point when the output gap improves by one percentage point.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 002730.

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Length: 26
Date of creation: 30 Mar 2007
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Handle: RePEc:col:000094:002730

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Keywords: Fiscal Policy; Business Cycle; Stabilization; Deficit; Budget;

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References

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  1. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
  2. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 2090, Harvard - Institute of Economic Research.
  3. Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile," IMF Working Papers 03/182, International Monetary Fund.
  4. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  5. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Carolina Mejía Mantilla & Mauricio Cárdenas & Mauricio Olivera, 2006. "La economía política del proceso presupuestal en Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO, FEDESARROLLO 002988, FEDESARROLLO.
  7. Luis Ignacio Lozano & Carolina Aristizabal, 2003. "Déficit Público y Desempeño Económico en los Noventa: El Caso Colombiano," BORRADORES DE ECONOMIA 002257, BANCO DE LA REPÚBLICA.
  8. Enrique Alberola & Manuel Montero, 2006. "Debt Sustainability and Procyclical Fiscal Policies in Latin America," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  9. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, Elsevier, vol. 38(1), pages 117-132, January.
  10. Paolo Manasse, 2006. "Procyclical Fiscal Policy," IMF Working Papers 06/27, International Monetary Fund.
  11. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
  12. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications, Inter-American Development Bank, Research Department 4032, Inter-American Development Bank, Research Department.
  13. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Daude, Christian & Melguizo, Ángel & Neut, Alejandro, 2011. "Fiscal policy in Latin America: Countercyclical and sustainable?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5(14), pages 1-29.
  2. Lavan Mahadeva & Javier Gómez Pineda, . "The international cycle and Colombian monetary policy," Borradores de Economia 557, Banco de la Republica de Colombia.
  3. Ignacio Lozano & Hernán Rincón & Miguel Sarmiento & Jorge Ramos, 2008. "Regla fiscal cuantitativa para consolidar y blindar las finanzas públicas de Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, Universidad Externado de Colombia - Facultad de Economía, vol. 10(19), pages 311-352, July-Dece.
  4. Juan Carlos Parra Alvarez, 2008. "Hechos Estilizados de la Economía Colombiana:Fundamentos Empíricos para la Construcción y Evaluación de un Modelo DSGE," BORRADORES DE ECONOMIA 004602, BANCO DE LA REPÚBLICA.
  5. Ignacio Lozano Espitia & Karen Rodríguez, 2009. "Assessing the Macroeconomic Effects of Fiscal," BORRADORES DE ECONOMIA 005386, BANCO DE LA REPÚBLICA.
  6. Juan José Echavarría & Andrés González & Enrique López & Norberto Rodíguez, 2012. "Choques internacionales reales y financieros y su impacto sobre la economía colombiana," Borradores de Economia 728, Banco de la Republica de Colombia.
  7. Jeromin Zettelmeyer & Ivanna Vladkova Hollar, 2008. "Fiscal Positions in Latin America," IMF Working Papers 08/137, International Monetary Fund.
  8. Ignacio Lozano & Karen Rodríguez, 2011. "Assessing the macroeconomic effects of fiscal policy in Colombia," Journal of Financial Economic Policy, Emerald Group Publishing, Emerald Group Publishing, vol. 3(3), pages 206-228, August.

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