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Effects of Fiscal Consolidations in Latin America

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  • André Diniz

    (São Paulo School of Economics—Fundacao Getulio Vargas)

Abstract

We use data on structural primary balances for Latin America to estimate effects of fiscal consolidations. Identification relies on a doubly robust estimator that controls for the endogeneity of fiscal policy using inverse probability weighting. Results suggest a negative multiplier on impact, with the economy starting to recover from the second year on and expanding after 5 years. Revenue-based adjustments are more contractionary on impact than expenditure-based adjustments. Among demand components, we find consumption to be generally less responsive to consolidations than investment. Results also depend on the initial levels of debt and taxation. In comparison with OECD evidence, Latin American countries display larger, but stop-and-go consolidations, with state-dependent long-run multipliers.

Suggested Citation

  • André Diniz, 2018. "Effects of Fiscal Consolidations in Latin America," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(4), pages 694-731, December.
    • Handle: RePEc:pal:imfecr:v:66:y:2018:i:4:d:10.1057_s41308-018-0069-1
    DOI: 10.1057/s41308-018-0069-1
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    2. Shobande Olatunji Abdul & Shodipe Oladimeji Tomiwa, 2019. "New Keynesian Liquidity Trap and Conventional Fiscal Stance: An Estimated DSGE Model," Economics and Business, Sciendo, vol. 33(1), pages 152-169, January.
    3. Shobande Olatunji Abdul, 2020. "Fiscal Rule in Africa," Open Economics, De Gruyter, vol. 3(1), pages 112-120, January.
    4. Ardanaz, Martín & Hallerberg, Mark & Scartascini, Carlos, 2020. "Fiscal consolidations and electoral outcomes in emerging economies: Does the policy mix matter? Macro and micro level evidence from Latin America," European Journal of Political Economy, Elsevier, vol. 64(C).
    5. Shobande Olatunji Abdul, 2020. "Fiscal Rule in Africa," Open Economics, De Gruyter, vol. 3(1), pages 112-120, January.
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    7. Ardanaz, Martín & Cavallo, Eduardo A. & Izquierdo, Alejandro & Puig, Jorge, 2021. "The Output Effects of Fiscal Consolidations: Does Spending Composition Matter?," IDB Publications (Working Papers) 11857, Inter-American Development Bank.

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    More about this item

    Keywords

    E62; H6;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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