Fiscal Policy Throughout The Business Cycle: The Colombian Experience
This paper reviews the close relationship between business cycle and public fi nances in Colombia. The international evidence shows that cyclical move-ments in output systematically affect the balance of public fi nances. Therefore, the assessment of cy-clical and structural components of the budget bal-ance becomes an important tool in the analysis of fi scal policy, because it may allow fi scal authorities to determine the extent to which the fi scal stance in a particular year refl ects their discretionary actions. Our fi ndings indicate that the cyclical component of the central government balance in Colombia has been fairly small in recent times (for about 10% of the overall defi cit). Governments are not usually neutral during the business cycle. Ideally, they ought to practice a countercyclical fi scal policy to moder-ate the magnitude of output fl uctuations. However, in emerging economies, countercyclical fi scal poli-cies are inhibited by domestic and external factors. Using a standard reduced form model closely con-nected to the government budget constraint, we fi nd that fi scal policy in Colombia has been procyclical over the last 45 years or so, with the primary sur-plus falling (and the defi cit rising) as a share of GDP by approximately 1/5th of a percentage point when the output gap increases by one percentage point.
Volume (Year): 25 (2007)
Issue (Month): 55 (December)
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