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Fiscal Policy Throughout the Cycle: The Colombian Experience

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Abstract

This paper reviews the relationship between the business cycle and public finances in Colombia. The evidence shows that cyclical movements in output systematically affect the situation of public finances. Hence, the distinction between the cyclical and permanent (i.e. structural) components of the fiscal balance may allow fiscal authorities to determine the extent to which the fiscal stance in a particular year reflects their discretionary actions. Our findings indicate that the cyclical component of the central government balance in Colombia has in general been fairly small. For instance, during the recession and recovery period 1999-2003, the cyclical component attained, on average, -0,5% of the GDP which explained only 8% of the actual overall deficit. More recently in 2006, the cyclical component amounted to +0,8% of the GDP, equivalent to 17% of the actual fiscal imbalance. Governments are not usually neutral during the business cycle. Ideally, they ought to practice a counter-cyclical fiscal policy to moderate the magnitude of output fluctuations. However, in emerging economies, counter-cyclical fiscal policies are inhibited by domestic and external factors, such as credit restrictions, quality of institutions, fiscal rules, corruption, voracity effect, etc. Using a standard approach we find that fiscal policy in Colombia has been pro-cyclical over the last 45 years or so, with the primary surplus falling (and the deficit rising) as a share of GDP by approximately 1/5th of a percentage point when the output gap improves by one percentage point.

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  • Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:434
    DOI: 10.32468/be.434
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    Cited by:

    1. Juan José Echavarría & Andrés González, 2012. "Choques internacionales reales y financieros y su impacto sobre la economía colombiana," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(69), pages 14-66, December.
    2. Ignacio Lozano-Espitia & Fernando Arias-Rodríguez & Jesus Bejarano & Andres Gonzalez & Clark Granger-Castaño & Franz Hamann & Yurany Hernández-Turca & Juan Manuel Julio-Román & Martha López & Juan C. , 2019. "La política fiscal y la estabilización macroeconómica en Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, issue 90, pages 1-60, April.
    3. Juan Camilo Galvis Ciro & Helder Ferreira de Mendonça, 2017. "Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia," Empirical Economics, Springer, vol. 53(4), pages 1529-1552, December.
    4. Clark Granger & Yurany Hernández & Jorge Ramos & Jorge Toro & Héctor Zárate, 2018. "La postura fiscal en Colombia a partir de los ajustes a las tarifas impositivas," Borradores de Economia 1038, Banco de la Republica de Colombia.
    5. Mr. Jeromin Zettelmeyer & Ivanna Vladkova Hollar, 2008. "Fiscal Positions in Latin America: Have They Really Improved?," IMF Working Papers 2008/137, International Monetary Fund.
    6. Gómez Munoz, Wilman & Rhenals M., Remberto, 2007. "Un cálculo del déficit fiscal estructural: análisis y una propuesta metodológica," Perfil de Coyuntura Económica, Universidad de Antioquia, CIE, December.
    7. Ignacio Lozano & Hernán Rincón & Miguel Sarmiento & Jorge Ramos, 2008. "Regla fiscal cuantitativa para consolidar y blindar las finanzas públicas de Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 10(19), pages 311-352, July-Dece.
    8. Enrique Alberola & Iván Kataryniuk & Ángel Melguizo & René Orozco, 2018. "Fiscal Policy and the Cycle in Latin America: the Role of Financing Conditions and Fiscal Rules," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 36(85), pages 101-116, November.
    9. Lavan Mahadeva & Javier Gómez Pineda, 2009. "The international cycle and Colombian monetary policy," Borradores de Economia 5406, Banco de la Republica.
    10. Ignacio Lozano & Karen Rodríguez, 2011. "Assessing the macroeconomic effects of fiscal policy in Colombia," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(3), pages 206-228, August.
    11. Ignacio Lozano Espitia & Karen Rodríguez, 2009. "Assessing the Macroeconomic Effects of Fiscal," Borradores de Economia 5386, Banco de la Republica.
    12. Garcia, D & Granda, C, 2019. "Informalidad, ciclos económicos y política fiscal: una exploración de los nexos," Documentos de trabajo - Alianza EFI 18984, Alianza EFI.
    13. Juan Carlos Parra Alvarez, 2008. "Hechos estilizados de la economía colombiana: fundamentos empíricos para la construcción y evaluación de un modelo DSGE," Borradores de Economia 509, Banco de la Republica de Colombia.
    14. Daude, Christian & Melguizo, Ángel & Neut, Alejandro, 2011. "Fiscal policy in Latin America: Countercyclical and sustainable?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 5, pages 1-29.
    15. Banegas Rivero, Roger Alejandro & González Vergara, Reyna, 2015. "Cambios institucionales y transición cíclica en la posición fiscal para Bolivia (2003-2011)," Revista Latinoamericana de Desarrollo Economico, Carrera de Economía de la Universidad Católica Boliviana (UCB) "San Pablo", issue 23, pages 67-96, Mayo.
    16. Isidro Hernández Rodríguez, 2015. "Economía política de la tributación en Colombia," Books, Universidad Externado de Colombia, Facultad de Economía, edition 1, number 70, August.
    17. Luis Ignacio Lozano, 2011. "Caracterización macro de la política fiscal en Colombia y postura frente a la crisis global (2008-2009)," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, June.

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    More about this item

    Keywords

    Fiscal Policy; Business Cycle; Stabilization; Deficit; Budget.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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