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Mexico needs a fiscal twist: Response to Covid-19 and beyond

Author

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  • Hannan, Swarnali Ahmed
  • Honjo, Keiko
  • Raissi, Mehdi

Abstract

Mexico's fiscal response to the pandemic has been modest compared to its peers, reflecting the authorities' desire to not issue new debt for spending. This approach, however, resulted in a more severe recession in 2020 and a weaker economic recovery, notwithstanding spillovers from the United States. Balancing the need for stronger near-term fiscal support for the people and the recovery against medium-term discipline, this paper lays out an alternative strategy. We show that credibly announcing a pro-growth and inclusive medium-term fiscal reform upfront—including increased tax capacity, higher public investment and strengthened social safety nets—would open space for larger short-term support and close medium-term fiscal gaps. Model simulations suggest that this package would boost output, limit lasting economic damage from the pandemic, and put debt trajectory on a declining path in the medium term as tax reforms pay off and risk premia decline.

Suggested Citation

  • Hannan, Swarnali Ahmed & Honjo, Keiko & Raissi, Mehdi, 2022. "Mexico needs a fiscal twist: Response to Covid-19 and beyond," International Economics, Elsevier, vol. 169(C), pages 175-190.
    • Handle: RePEc:eee:inteco:v:169:y:2022:i:c:p:175-190
    DOI: 10.1016/j.inteco.2022.01.004
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    1. Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2017. "Is There a Debt-Threshold Effect on Output Growth?," The Review of Economics and Statistics, MIT Press, vol. 99(1), pages 135-150, March.
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    3. Chudik, Alexander & Mohaddes, Kamiar & Raissi, Mehdi, 2021. "Covid-19 fiscal support and its effectiveness," Economics Letters, Elsevier, vol. 205(C).
    4. Vitor Gaspar & David Amaglobeli & Ms. Mercedes Garcia-Escribano & Delphine Prady & Mauricio Soto, 2019. "Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs," IMF Staff Discussion Notes 2019/003, International Monetary Fund.
    5. Juan Pablo Cuesta Aguirre & Mrs. Swarnali A Hannan, 2021. "Recoveries After Pandemics: The Role of Policies and Structural Features," IMF Working Papers 2021/181, International Monetary Fund.
    6. Mr. David Coady & Nghia-Piotr Le, 2020. "Designing Fiscal Redistribution: The Role of Universal and Targeted Transfers," IMF Working Papers 2020/105, International Monetary Fund.
    7. Margaret Grosh & Carlo del Ninno & Emil Tesliuc & Azedine Ouerghi, 2008. "For Protection and Promotion : The Design and Implementation of Effective Safety Nets," World Bank Publications - Books, The World Bank Group, number 6582, December.
    8. Mr. Douglas Laxton & Susanna Mursula & Mr. Michael Kumhof & Mr. Dirk V Muir, 2010. "The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure," IMF Working Papers 2010/034, International Monetary Fund.
    9. World Bank, 2018. "The State of Social Safety Nets 2018," World Bank Publications - Books, The World Bank Group, number 29115, December.
    10. Vitor Gaspar & David Amaglobeli & Mercedes Garcia-Escribano & Delphine Prady & Mauricio Soto, 2019. "Fiscal Policy and Development; Human, Social, and Physical Investments for the SDGs," IMF Staff Discussion Notes 19/03, International Monetary Fund.
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    Cited by:

    1. Buffie, Edward F. & Adam, Christopher & Zanna, Luis-Felipe & Kpodar, Kangni, 2023. "Loss-of-learning and the post-Covid recovery in low-income countries," Journal of Macroeconomics, Elsevier, vol. 75(C).
    2. Emilio Espino & Julian Kozlowski & Fernando M. Martin & Juan M. Sanchez, 2022. "Policy Rules and Large Crises in Emerging Markets," Working Papers 2022-018, Federal Reserve Bank of St. Louis, revised 14 Oct 2023.
    3. Julie Ann Q. Basconcillo, 2023. "A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 477-503.
    4. Juan Alberto Vázquez Muñoz & Nancy Ivonne Muller Durán & Josué Zavaleta González, 2021. "Public Deficits in USMCA Economies During the COVID-19 Economic Crisis," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(3), pages 1-21, Julio - S.
    5. André, Marine C. & Armijo, Alberto & Espidio, Sebastián Medina & Sandoval, Jamel, 2023. "Policy mix in a small open emerging economy with commodity prices," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(1).
    6. Bai, Chenjiang & Duan, Yuejiao & Liu, Congya & Qiu, Leiju, 2022. "International taxation sentiment and COVID-19 crisis," Research in International Business and Finance, Elsevier, vol. 63(C).
    7. Osuna Gómez Daniel, 2022. "The Impact of the COVID-19 Pandemic on Post-Great Recession Formal Entrants: Evidence from Mexico," Working Papers 2022-19, Banco de México.

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    More about this item

    Keywords

    Covid-19; Fiscal response; Tax; Social safety nets; General equilibrium model;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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