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Is tighter fiscal policy expansionary under fiscal dominance? Hypercrowding out in Latin America

  • William C. Gruben
  • John H. Welch
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    We test for hypercrowding out as a signal of market concerns over fiscal dominance in five Latin American countries. Hypercrowding out occurs when fiscally dominated governments’ domestic credit demands are perceived as so intrusive to a nation’s financial system that a move towards fiscal surplus lowers interest rates and increases growth. We sample five Latin American countries to test for these relationships. Judged by the results of vector error correction models, three nations test clearly positive, suggesting market concern despite their recent efforts towards fiscal balance.

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    File URL: http://dallasfed.org/assets/documents/research/claepapers/2005/lawp0502.pdf
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    Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0205.

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    Date of creation: 2005
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    Handle: RePEc:fip:feddcl:0205
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    1. Reinhart, Carmen & Rogoff, Kenneth, 2004. "Serial default and the “paradox” of rich to poor capital flows," MPRA Paper 13997, University Library of Munich, Germany.
    2. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
    4. Favero, Carlo A. & Giavazzi, Francesco, 2004. "Inflation Targeting and Debt: Lessons from Brazil," CEPR Discussion Papers 4376, C.E.P.R. Discussion Papers.
    5. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    6. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
    7. Reinhart, Carmen M. & Rogoff, Kenneth S., 2004. "Serial Default and the “Paradox†of Rich-to-Poor Capital Flows," Scholarly Articles 11129182, Harvard University Department of Economics.
    8. Welch, John H. & Braga, Carlos Alberto Primo & de Tarso, Paulo & de Andre, Afonso, 1987. "Brazilian public sector disequilibrium," World Development, Elsevier, vol. 15(8), pages 1045-1052, August.
    9. Assaf Razin & Efraim Sadka, 2002. "A Brazilian Debt-Crisis," NBER Working Papers 9160, National Bureau of Economic Research, Inc.
    10. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, 04.
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