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Structural Breaks in Fiscal Performance

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  • Leandro Medina
  • Carlos Caceres
  • Ana Corbacho

Abstract

In recent years, many countries have adopted Fiscal Responsibility Laws to strengthen fiscal institutions and promote fiscal discipline in a credible, predictable and transparent manner. Still, results on the effectiveness of these laws remain tentative. In this paper, we test empirically whether fiscal performance, measured as the level of primary fiscal balances and their volatility, indeed improved after the implementation of Fiscal Responsibility Laws in a sample of Latin American and advanced economies. We show that traditional econometric approaches, which rely on the use of dummies in time series or panel regressions, yield biased estimates. In contrast, our empirical strategy recognizes that, a priori, the timing of the effect of these laws on fiscal performance is unknown, while controlling for the impact of the business and commodity cycles on fiscal outcomes. Overall, we find limited empirical evidence in support of the view that Fiscal Responsibility Laws have had a distinguishable effect on fiscal performance. However, Fiscal Responsibility Laws could still have other positive effects on the conduct of fiscal policy not analyzed here, for instance, through enhanced transparency and guidance in the budget process and lower risk premia.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/248.

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Length: 27
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/248

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Keywords: Commodity price fluctuations; Developed countries; Economic models; Fiscal analysis; Latin America; Consumption; fiscal performance; fiscal balance; fiscal balances; fiscal policy; primary fiscal balance; probability; fiscal rules; fiscal outcomes; fiscal responsibility; statistic; fiscal responsibility laws; fiscal institutions; equation; time series; fiscal discipline; equations; regression analysis; fiscal deficits; fiscal balance in percent; structural fiscal; statistics; probabilities; dummy variable; samples; budget process; budget deficits; time series analysis; sample size; public debt; tax base; markov chain; public finances; maximum likelihood estimator; fiscal adjustment; tax changes; capital expenditures; fiscal policy rules; standard errors; predictability; fiscal adjustment processes; fiscal prudence; linear regressions; random error; maximum likelihood estimation; estimation bias; fiscal affairs department; econometrics; martingale; fiscal affairs; survey; fiscal crises; national budget; structural fiscal reform; fiscal transparency; fiscal policies; fiscal consolidation; budget management; empirical model; budgetary institutions;

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References

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  1. Ricardo Hausmann & Alberto Alesina & Rudolf Hommes & Ernesto H. Stein, 1998. "Budget Institutions and Fiscal Performance in Latin America," Research Department Publications 4160, Inter-American Development Bank, Research Department.
  2. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  4. 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.
  5. Leandro Medina, 2010. "The Dynamic Effects of Commodity Priceson Fiscal Performance in Latin America," IMF Working Papers 10/192, International Monetary Fund.
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Cited by:
  1. Klaus Schmidt-Hebbel, 2012. "Fiscal Policy for Commodity Exporting Countries: Chile's Experience," Documentos de Trabajo 415, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..

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