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De facto Fiscal Space and Fiscal Stimulus: Definition and Assessment

  • Aizenman, Joshua
  • Jinjarak, Yothin

We define the notion of a ‘de facto fiscal space’ of a country as the inverse of the tax-years itwould take to repay the public debt. Specifically, we measure the outstanding public debtrelative to the de facto tax base, where the latter measures the realized tax collection, averagedacross several years to smooth for business cycle fluctuations. We apply this concept to accountfor the cross-country variation in the fiscal stimulus associated with the global crisis of 2009-2010. We find that greater de facto fiscal space prior to the global crisis, higher GDP/capita,higher financial exposure to the US, and lower trade openness were associated with a higherfiscal stimulus/GDP during 2009-2010. Joint estimation indicates that higher trade openness wasassociated with lower fiscal stimulus and higher depreciation rate during 2009-2010.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt6dn0n13t.

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Date of creation: 01 Dec 2010
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Handle: RePEc:cdl:ucscec:qt6dn0n13t
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  1. Aizenman, Joshua & Jinjarak, Yothin, 2006. "Globalization and Developing Countries - a Shrinking Tax Base ?," Santa Cruz Department of Economics, Working Paper Series qt8r12k4xr, Department of Economics, UC Santa Cruz.
  2. Aizenman, Joshua & Jinjarak, Yothin, 2010. "De facto Fiscal Space and Fiscal Stimulus: Definition and Assessment," Santa Cruz Department of Economics, Working Paper Series qt6dn0n13t, Department of Economics, UC Santa Cruz.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  4. Joshua Aizenman & Gurnain Kaur Pasricha, 2010. "Fiscal fragility: what the past may say about the future," NBER Working Papers 16478, National Bureau of Economic Research, Inc.
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