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Fiscal Stimulus and Credibility in Emerging Countries

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  • Magda Kandil

    () (Western Hemisphere Department, International Monetary Fund, District of Columbia, 700 Nineteenth St., Washington DC 20431, USA.)

  • Hanan Morsy

    () (Office of the Chief Economist, European Bank for Reconstruction and Development (EBRD), One Exchange Square, London EC2A 2JN, UK.)

Abstract

Across a sample of 34 emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for counter-cyclical 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 run and long run and its underlying conditions, which does not appear to be uniform.

Suggested Citation

  • Magda Kandil & Hanan Morsy, 2014. "Fiscal Stimulus and Credibility in Emerging Countries," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 40(3), pages 420-439, June.
  • Handle: RePEc:pal:easeco:v:40:y:2014:i:3:p:420-439
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    1. 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.
    2. 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.
    3. 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.
    4. 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.
    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. 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.
    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. Antonio Spilimbergo & Steve Symansky & Olivier Blanchard & Carlo Cottarelli, 2009. "Fiscal Policy For The Crisis," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(2), pages 26-32, July.
    9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    10. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
    11. 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.
    12. Romain Ranciere & Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
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    Cited by:

    1. Kerényi, Ádám, 2012. "Need for rethinking of the Hungarian fiscal and monetary policy," MPRA Paper 40352, University Library of Munich, Germany.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    3. Michel Strawczynski & Joseph Zeira, 2013. "Procyclicality of Fiscal Policy in Emerging Countries: The Cycle is the Trend," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 11, pages 427-466 Central Bank of Chile.
    4. Alymkulova Nargiza Bakytovna & Atabaev Nurlan Uzgenovich & Ganiev Junus Mashrapovich, 2016. "Var - analysis of Global financial economic crisis impact on public budget and unemployment: evidence from the economy of the Kyrgyz Republic," Экономика региона, CyberLeninka;Федеральное государственное бюджетное учреждение науки «Институт экономики Уральского отделения Российской академии наук», vol. 12(4), pages 1090-1101.
    5. Hanan Morsy, 2012. "Current Account Determinants for Oil-Exporting Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 122-133, March.
    6. Hanan Morsy, 2012. "Current Account Determinants for Oil-Exporting Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 122-133, March.
    7. Crespo Cuaresma, Jesús & Eller, Markus & Mehrotra, Aaron, 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.
    8. Tang, Hsiao Chink & Liu, Philip & Cheung, Eddie C., 2013. "Changing impact of fiscal policy on selected ASEAN countries," Journal of Asian Economics, Elsevier, vol. 24(C), pages 103-116.
    9. Nargiza Alymkulova & Nurlan Atabaev & Junus Ganiev, 2016. "Var — analysis of global financial economic crisis impact on public budget and unemployment: evidence from the economy of the Kyrgyz republic," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(4), pages 1090-1101.

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