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Fiscal Stimulus and Credibility in Emerging Countries

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Author Info

  • Magda E. Kandil
  • Hanan Morsy

Abstract

Across a sample of thirty four emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for countercyclical policy increases with the availability of international reserves as it enhances credibility and mitigates concerns about the effect of expansionary fiscal policy on the cost of borrowing and debt service. The paper also examines the effectiveness of the fiscal policy in emerging countries in the short- and long-run and its underlying conditions, which does not appear to be uniform. In some cases, contractionary fiscal policy could stimulate growth in the short-run, if fiscal tightness lowers the cost of borrowing and debt service, and mitigates concerns about debt sustainability. However, an increase in international reserves is evident to mitigate these concerns. On the other hand, high inflation increases concerns about the impact of fiscal spending on inflationary expectations and the cost of borrowing, countering the effectiveness of the fiscal stimulus on output growth in the short-run. Where the debt burden is high, fiscal expansion has a longlasting negative effect on real growth.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/123.

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Length: 24
Date of creation: 01 May 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/123

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Keywords: Emerging markets; Economic models; fiscal impulse; fiscal policy; exchange rate; fiscal stimulus; fiscal expansion; government spending; expansionary fiscal; exchange rate system; expansionary fiscal policy; exchange rate appreciation; fiscal policies; fiscal balance; debt service; effective exchange rate; exchange rate regime; fixed exchange rate; real effective exchange rate; fiscal space; fiscal stance; fiscal spending; fixed exchange rate system; cyclical fiscal policy; expansionary fiscal stance; real exchange rate; public debt; discretionary fiscal policy; cyclical fiscal policies; flexible exchange rate; government spending shocks; expansionary fiscal policies; fiscal deficit; aggregate demand; government expenditure; government revenue; fiscal multiplier; fiscal contraction; fiscal deficits; fiscal adjustment; tax changes; account deficits; real exchange rate appreciation; tax incentives; exchange rate fluctuations; exchange rate shocks; public finance; budget process; fiscal package; fiscal tightness; fiscal sustainability; fiscal efforts; fiscal management; fiscal instruments; exchange rate systems; flexible exchange rate system; fiscal discipline; fiscal response; exchange rates; general government expenditure; flexible exchange rate systems;

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References

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  1. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  2. Kamilya Tazhibayeva & Aasim M. Husain & Anna Ter-Martirosyan, 2008. "Fiscal Policy and Economic Cycles in Oil-Exporting Countries," IMF Working Papers 08/253, International Monetary Fund.
  3. Magda Kandil, 2005. "On the Effects of Government Spending Shocks in Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 269-304.
  4. Blanchard, Olivier J & Cottarelli, Carlo & Spilimbergo, Antonio & Symansky, Steven, 2009. "Fiscal Policy for the Crisis," CEPR Discussion Papers 7130, C.E.P.R. Discussion Papers.
    • Antonio Spilimbergo & Steve Symansky & Olivier Blanchard & Carlo Cottarelli, 2009. "Fiscal Policy For The Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 26-32, 07.
  5. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  6. Gian Maria Milesi-Ferretti, 1997. "Fiscal Rules and the Budget Process," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 56(1-2), pages 5-40, June.
  7. Magda Kandil, 2006. "The growth of government spending and the money supply: Evidence and implications within and across industrial countries," Journal of Economic Studies, Emerald Group Publishing, vol. 33(6), pages 406-436, November.
  8. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
  9. Kandil, Magda, 2006. "Variation in the effects of government spending shocks with methods of financing: Evidence from the U.S," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 463-486.
  10. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.
  11. Kandil, Magda, 2009. "Demand-side stabilization policies: What is the evidence of their potential?," Journal of Economics and Business, Elsevier, vol. 61(3), pages 261-276.
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Citations

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Cited by:
  1. Michel Strawczynski & Joseph Zeira, 2011. "Procyclicality of Fiscal Policy in Emerging Countries: the Cycle is the Trend," Working Papers Central Bank of Chile 624, Central Bank of Chile.
  2. Tang, Hsiao Chink & Liu, Philip & Cheung, Eddie C., 2010. "Changing Impact of Fiscal Policy on Selected ASEAN Countries," Working Papers on Regional Economic Integration 70, Asian Development Bank.
  3. Mehrotra, Aaron & Crespo Cuaresma, Jesús & Eller, Markus, 2011. "The Economic transmission of fiscal policy shocks from Western to Eastern Europe," BOFIT Discussion Papers 12/2011, Bank of Finland, Institute for Economies in Transition.
  4. Kerényi, Ádám, 2012. "Need for rethinking of the Hungarian fiscal and monetary policy," MPRA Paper 40352, University Library of Munich, Germany.

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