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The Underlying Link between Fiscal Policy Patterns and International Reserves

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  • Yan Zhou

Abstract

This paper extends the model in Aizenman and Marion (2004) to study the underlying link and interaction between fiscal policy patterns and international reserves in developing countries. It shows that because of conditional access to international credit markets, the immediate impact of an adverse shock on an emerging economy is a lower level of international reserves and a procyclical fiscal policy. However, facing the uncertainty of future shocks, the authorities in this economy then have a strong incentive to hoard more precautionary reserves if possible. If the economy successfully accumulates more reserves, it can have a lower tax rate in the second period and its fiscal policy would be more countercyclical. The model's predictions are consistent with new empirical findings. Copyright (C) 2010 Blackwell Publishing Ltd.

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  • Yan Zhou, 2010. "The Underlying Link between Fiscal Policy Patterns and International Reserves," Review of Development Economics, Wiley Blackwell, vol. 14(4), pages 712-725, November.
  • Handle: RePEc:bla:rdevec:v:14:y:2010:i:4:p:712-725
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    References listed on IDEAS

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    1. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, September.
    2. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    3. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    4. repec:hrv:faseco:34729976 is not listed on IDEAS
    5. Sunghyun Henry Kim & M. Ayhan Kose & Michael G. Plummer, 2003. "Dynamics of Business Cycles in Asia: Differences and Similarities," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 462-477, August.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    7. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    8. 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.
    9. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    10. Yan Zhou, 2009. "International Reserves and Fiscal Policy in Developing Countries," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 942-960, November.
    11. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
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    1. repec:rjr:romjef:v::y:2017:i:4:p:152-165 is not listed on IDEAS

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