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Underlying Factors Driving Fiscal Effort in Emerging Market Economies

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  • Taimur Baig
  • Abdul Abiad

Abstract

Using a panel dataset of 34 emerging market countries for the period 1990-2002, we examine the roles of various economic, political, and institutional variables in determining fiscal effort, as proxied by the primary surplus. We find that while fiscal effort increases, as expected, with the level of lagged debt, this effect tapers off beyond a certain threshold. We also find an inverse U-shaped relationship between the primary balance and revenue. Fiscal effort rises with positive shocks to oil prices (for oil exporters), when the economy grows above its potential, and in the presence of an IMF-supported program. In contrast, high democratic accountability and strong and impartial bureaucracies help lower market risk and hence lower the relative need for fiscal adjustment. Finally, fiscal effort tends to decline when too many constraints are faced by the executive.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/106.

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Length: 28
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/106

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Keywords: Public debt; Fiscal sustainability; Emerging markets; Economic models; fiscal effort; institutional variables; fiscal policy; democratic accountability; fiscal adjustment; institutional quality; fiscal performance; fiscal prudence; fiscal balance; fiscal adjustments; fiscal affairs department; debt service; bureaucratic quality; government expenditures; fiscal affairs; democratic institutions; fiscal balances; tax rates; fiscal policies; cyclical fiscal policy; fiscal variables; public expenditures; fiscal outcomes; budget deficit; taxation; fiscal policy response; government revenue; fiscal behavior; institutional environment; budget constraint; fiscal position; budget deficits; public finance; fiscal management; budgetary institutions; fiscal adjustment episodes; prudent fiscal management; structural fiscal; fiscal regime; fiscal decentralization;

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  1. 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.
  2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  3. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
  4. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, 03.
  5. Torsten Persson, 2002. "Do Political Institutions Shape Economic Policy?," Econometrica, Econometric Society, vol. 70(3), pages 883-905, May.
  6. 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.
  7. Cukierman, Alex & Tommasi, Mariano, 1998. "When Does It Take a Nixon to Go to China?," American Economic Review, American Economic Association, vol. 88(1), pages 180-97, March.
  8. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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Cited by:
  1. Oya Celasun & Joong Shik Kang, 2006. "On the Properties of Various Estimators for Fiscal Reaction Functions," IMF Working Papers 06/182, International Monetary Fund.
  2. Lavigne, Robert, 2011. "The political and institutional determinants of fiscal adjustment: Entering and exiting fiscal distress," European Journal of Political Economy, Elsevier, vol. 27(1), pages 17-35, March.
  3. Garima Vasishtha & Taimur Baig & Manmohan S. Kumar & Edda Zoli, 2006. "Fiscal and Monetary Nexus in Emerging Market Economies," IMF Working Papers 06/184, International Monetary Fund.
  4. Robert Lavigne, 2006. "The Institutional and Political Determinants of Fiscal Adjustment," Working Papers 06-1, Bank of Canada.
  5. Ludvig Söderling & Hanan Morsy & Martin Petri & Martin Hommes & Manal Fouad & Wojciech Maliszewski, 2007. "Public Debt and Fiscal Vulnerability in the Middle East," IMF Working Papers 07/12, International Monetary Fund.
  6. Rupa Duttagupta & Guillermo Tolosa, 2006. "Fiscal Discipline and Exchange Rate Regimes," IMF Working Papers 06/119, International Monetary Fund.
  7. Gregory Thwaites, 2006. "Optimal emerging market fiscal policy when trend output growth is unobserved," Bank of England working papers 308, Bank of England.
  8. Alexander Plekhanov & Manmohan S. Kumar & Daniel Leigh, 2007. "Fiscal Adjustments," IMF Working Papers 07/178, International Monetary Fund.

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