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Debt sustainability and procyclical fical policies in Latin America

Author

Listed:
  • Enrique Alberola

    () (Banco de España)

  • José M. Montero

    () (Banco de España)

Abstract

The computation of structural primary balances for the nine main Latin American countries and their comparison of their changes with their cyclical position during the period 1981 2004 confirms that fiscal policy is procyclical in the region. From this evidence, the paper shows strong evidence that the fiscal behaviour is closely linked to the financial vulnerability position of the economies and in particular to the perception on the sustainability of debt. The current threshold balance, defined as the primary balance which would render the debt stable under the existing economic and financial conditions, is used as our gauge for measuring debt sustainability at each point in time. The empirical analysis reveals that the fiscal stance tightens when the debt sustainability perceptions worsen, and that this effect is stronger the less sustainable debt is perceived. The results are robust to different specifications and estimation methods.

Suggested Citation

  • Enrique Alberola & José M. Montero, 2006. "Debt sustainability and procyclical fical policies in Latin America," Working Papers 0611, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0611
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    References listed on IDEAS

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    Cited by:

    1. Enrique Alberola & Iván Kataryniuk & Ángel Melguizo & René Orozco, 2016. "Fiscal policy and the cycle in Latin America: the role of financing conditions and fiscal rules," Working Papers 1604, Banco de España;Working Papers Homepage.
    2. Mauricio Villafuerte & Pablo López-Murphy & Rolando Ossowski, 2013. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resource Exporters in Latin America and the Caribbean," 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 5, pages 117-173 Central Bank of Chile.
    3. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," BORRADORES DE ECONOMIA 002730, BANCO DE LA REPÚBLICA.
    4. Juliana Dutra Araujo, 2009. "Fiscal Cycles in the Caribbean," IMF Working Papers 09/158, International Monetary Fund.
    5. Jeronimo Zettelmeyer & Ivanna Vladkova Hollar, 2008. "Fiscal Positions in Latin America; Have They Really Improved?," IMF Working Papers 08/137, International Monetary Fund.
    6. Carlos Vegh & Daniel Lederman & Federico R. Bennett, "undated". "Leaning Against the Wind," World Bank Other Operational Studies 26364, The World Bank.
    7. Israa A. El Husseiny, 2016. "Budgetary Institutions and Fiscal Performance in Egypt: Is There a Link?," Public Budgeting & Finance, Wiley Blackwell, vol. 36(1), pages 85-105, February.
    8. Irene Yackovlev & Victor Duarte Lledo & Lucie Gadenne, 2009. "Cyclical Patterns of Government Expenditures in Sub-Saharan Africa; Facts and Factors," IMF Working Papers 09/274, International Monetary Fund.
    9. Alberola, Enrique & Molina, Luis & Navia, Daniel, 2007. "Say you fix, enjoy and relax. The deleterious effect of peg announcements on fiscal discipline in emerging markets," Emerging Markets Review, Elsevier, vol. 8(4), pages 328-338, December.
    10. Sophia Gollwitzer & Eteri Kvintradze & Tej Prakash & Luis-Felipe Zanna & Era Dabla-Norris & Richard I Allen & Irene Yackovlev & Victor Duarte Lledo, 2010. "Budget Institutions and Fiscal Performance in Low-Income Countries," IMF Working Papers 10/80, International Monetary Fund.
    11. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 5-33, November.
    12. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
    13. Sergey Vlasov, 2011. "Russian Fiscal Framework Past, Present and Future.Do we Need a Change?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(64), pages 35-81, October -.
    14. Enrique Alberola-Ila & Ricardo Sousa, 2017. "Assessing fiscal policy through the lens of the financial and the commodity price cycles," BIS Working Papers 638, Bank for International Settlements.
    15. Juan Carlos Berganza, 2011. "Fiscal rules in Latin America: a survey," Occasional Papers 1108, Banco de España;Occasional Papers Homepage.
    16. Abbott, Andrew & Jones, Philip, 2012. "Budget deficits and social protection: Cyclical government expenditure in the OECD," Economics Letters, Elsevier, vol. 117(3), pages 909-911.
    17. Mauricio Villafuerte & Pablo López-Murphy & Rolando Ossowski, 2011. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resources Exporters in Latin America and the Caribbean ," Working Papers Central Bank of Chile 609, Central Bank of Chile.
    18. Ugo Panizza & Dany Jaimovich, 2007. "Prociclicalidad o Causalidad Reversa?," Research Department Publications 4509, Inter-American Development Bank, Research Department.

    More about this item

    Keywords

    procyclical fiscal policy; debt sustainability;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance

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