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

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  • William C. Gruben
  • John H. Welch

Abstract

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 nations 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.

Suggested Citation

  • William C. Gruben & John H. Welch, 2005. "Is tighter fiscal policy expansionary under fiscal dominance? Hypercrowding out in Latin America," Center for Latin America Working Papers 0205, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddcl:0205
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    Cited by:

    1. Pablo Mendieta Ossio & Hugo Rodriguez Gonzales, 2005. "Interacción de la política fiscal con la política monetaria en el MERCOSUR y países asociados," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 8(1), pages 49-97, December.

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