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Is tighter fiscal policy expansionary under fiscal dominance? Hypercrowding out in Latin America

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  • William C. Gruben
  • John H. Welch
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    Abstract

    We test for hypercrowding out as a signal of market concerns over fiscal dominance in five Latin American countries. Hypercrowding out occurs when fiscally dominated governments’ domestic credit demands are perceived as so intrusive to a nation’s financial system that a move towards fiscal surplus lowers interest rates and increases growth. We sample five Latin American countries to test for these relationships. Judged by the results of vector error correction models, three nations test clearly positive, suggesting market concern despite their recent efforts towards fiscal balance.

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    File URL: http://dallasfed.org/assets/documents/research/claepapers/2005/lawp0502.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0205.

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    Date of creation: 2005
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    Handle: RePEc:fip:feddcl:0205

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    1. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
    2. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
    3. Reinhart, Carmen & Rogoff, Kenneth, 2004. "Serial default and the “paradox” of rich to poor capital flows," MPRA Paper 13997, University Library of Munich, Germany.
    4. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    5. Assaf Razin & Efraim Sadka, 2002. "A Brazilian Debt-Crisis," NBER Working Papers 9160, National Bureau of Economic Research, Inc.
    6. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
    7. Carlo A. Favero & Francesco Giavazzi, 2004. "Inflation Targeting and Debt: Lessons from Brazil," NBER Working Papers 10390, National Bureau of Economic Research, Inc.
    8. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, 04.
    9. Welch, John H. & Braga, Carlos Alberto Primo & de Tarso, Paulo & de Andre, Afonso, 1987. "Brazilian public sector disequilibrium," World Development, Elsevier, vol. 15(8), pages 1045-1052, August.
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    Cited by:
    1. Pablo Mendieta Ossio & Hugo Rodriguez Gonzales, 2005. "Interacción de la política fiscal con la política monetaria en el MERCOSUR y países asociados," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 8(1), pages 49-97, December.

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