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What Sustains Fiscal Consolidations in Emerging Market Countries?

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  • Benedict J. Clements
  • Sanjeev Gupta
  • Erwin Tiongson
  • Emanuele Baldacci
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    Abstract

    This paper examines the factors affecting the persistence of fiscal consolidation in 25 emerging market countries during 1980-2001. It proposes a new approach for defining spells of fiscal consolidation. The results indicate that the probability of ending a fiscal adjustment is affected by the legacy of previous fiscal failures, the size of the deficit, the composition of spending, and level of total revenues. There is also some evidence that the initial debt stock, exchange rate developments, inflation, and the unemployment rate have an impact on the persistence of adjustments.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/224.

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    Length: 27
    Date of creation: 01 Nov 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/224

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    Keywords: Fiscal consolidation; Emerging markets; Fiscal reforms; Structural adjustment; fiscal adjustment; probability; fiscal adjustments; fiscal deficit; fiscal consolidations; fiscal policy; public debt; budget deficit; fiscal sustainability; statistics; fiscal control; functional form; fiscal deficits; primary deficit; fiscal reform; public expenditure; revenue collection; fiscal vulnerability; fiscal variables; excessive deficits; exponential distribution; fiscal adjustment episodes; fiscal performance; expenditure cuts; dummy variables; tax rates; goodness of fit; expenditure composition; structural fiscal reforms; tax evasion; empirical framework; structural fiscal; capital expenditure; fiscal consolidation effort; dummy variable; tax increases; probability density; fiscal consolidation episodes; fiscal expansion; fiscal contractions; probability density function; multivariate analysis; tax administration; fiscally sustainable; tax effort; empirical result; sample size; fiscal affairs department; expenditure increases; statistical methods; fiscal imbalances; tax base; debt service; tight fiscal policy; increases in tax rates; fiscal targets; statistic; fiscal policies; budgetary consolidation; fiscal adjustment in transition; fiscal deficit reductions; fiscal position; fiscal stability; equations; discretionary fiscal policy; tax revenues; probability distribution; logarithm; counting; correlations; expenditure reform; equation; confidence intervals; tax revenue; budget deficits; random variable; government budget; public expenditure reform; government expenditure; general equilibrium model; fiscal stabilizations; tax collection; long-term fiscal sustainability; fiscal conditions; fiscal contraction; expenditure programs; fiscal affairs; public deficits; public finance; aggregate fiscal; foreign debt;

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    References

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    1. Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 104(3), pages 423-41, September.
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    8. Heylen, Freddy & Everaert, Gerdie, 2000. " Success and Failure of Fiscal Consolidation in the OECD: A Multivariate Analysis," Public Choice, Springer, Springer, vol. 105(1-2), pages 103-24, October.
    9. Hjelm, Göran & Johansson, Martin W, 2002. "Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland," Working Papers, Lund University, Department of Economics 2002:11, Lund University, Department of Economics.
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    21. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
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    23. Ardagna, Silvia, 2001. " Fiscal Policy Composition, Public Debt, and Economic Activity," Public Choice, Springer, Springer, vol. 109(3-4), pages 301-25, December.
    24. von Hagen, Jurgen & Hughes Hallett, Andrew & Strauch, Rolf, 2002. "Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 512-535, December.
    25. Sanjeev Gupta & Benedict Clements & Emanuele Baldacci & Carlos Mulas-Granados, 2004. "The persistence of fiscal adjustments in developing countries," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(4), pages 209-212.
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    Citations

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    Cited by:
    1. Sanjeev Gupta & Alejandro Simone & Alex Segura-Ubiergo, 2006. "New Evidenceon Fiscal Adjustment and Growth in Transition Economies," IMF Working Papers 06/244, International Monetary Fund.
    2. Mohamed Fenira, 2014. "Democracy: A Determinant Factor in Reducing Inflation," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 363-375.
    3. Ali Bayar & Bram Smeets, 2009. "Government Deficits in the European Union: An Analysis of Entry and Exit Dynamics," CESifo Working Paper Series 2703, CESifo Group Munich.
    4. Schaltegger, Christoph & Weder, Martin, 2013. "Fiscal Adjustments and the Probability of Sovereign Default," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79979, Verein für Socialpolitik / German Economic Association.
    5. Benedict J. Clements & Sanjeev Gupta & Emanuele Baldacci & Carlos Mulas-Granados, 2004. "Front-Loaded or Back-Loaded Fiscal Adjustments," IMF Working Papers 04/157, International Monetary Fund.
    6. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
    7. Robert Lavigne, 2006. "The Institutional and Political Determinants of Fiscal Adjustment," Working Papers, Bank of Canada 06-1, Bank of Canada.
    8. Sanjeev Gupta & Carlos Mulas-Granados & Emanuele Baldacci, 2009. "How Effective is Fiscal Policy Response in Systemic Banking Crises?," IMF Working Papers 09/160, International Monetary Fund.
    9. Murtaza H. Syed & Michael Skaarup & Tarhan Feyzioglu, 2008. "Addressing Korea's Long-Term Fiscal Challenges," IMF Working Papers 08/27, International Monetary Fund.
    10. World Bank, 2008. "Nicaragua : Public Expenditure Review 2001-2006," World Bank Other Operational Studies 8090, The World Bank.
    11. Mati, Amine & Thornton, John, 2008. "The exchange rate and fiscal consolidation episodes in emerging market economies," Economics Letters, Elsevier, Elsevier, vol. 100(1), pages 115-118, July.
    12. Gnangnon, Sèna Kimm, 2014. "The Effect of Development Aid Unpredictability and Migrants’ Remittances on Fiscal Consolidation in Developing Countries," World Development, Elsevier, Elsevier, vol. 54(C), pages 168-190.

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