This article's main goal is to evaluate the degree of fiscal dominance in Uruguay in 1999-2019 to improve the understanding of economic policy for theoretical reasons and applied needs related to good practices and accountability. Two strategies are followed: one, to quantify the fraction of fiscal expenditures that are financed by monetary liabilities and, the other one, to analyze the effects of fiscal deficit on the price level and inflation because inflationary financing may prevent the central bank from reaching its inflation target. Both situations may subordinate the monetary policy to the fiscal policy, signaling fiscal dominance. In addition, through the analysis performed to assess the degree of fiscal dominance, it is possible to detect the main determining factors of the Uruguayan price level (inflation) formation during the last two decades. So far, preliminary results suggest that inflation is not exclusively a monetary phenomenon and point to some inflationary financing with a mild degree of fiscal dominance.
work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose, as provided below. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Following a peer review process, and with previous written consent by the Inter-American Development Bank (IDB), a revised version of this work may also be reproduced in any academic journal, including those indexed by the American Economic Association's EconLit, provided that the IDB is credited and that the author(s) receive no income from the publication. Therefore, the restriction to receive income from such publication shall only extend to the publication's author(s). With regard to such restriction, in case of any inconsistency between the Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives license and these statements, the latter shall prevail.Note that link provided above includes additional terms and conditions of the license. This study analyzes the effects of "financial stress" on the Uruguayan macroeconomy in the 1998Q3-2016Q2 period with the underlying idea that financial shocks propagate differently during "normal times" than during times of "stress." This behavior is captured in a multivariate framework through a Markovswitching vector auto regressive (MS-VAR) model. The evidence found so far supports the idea that financial conditions affect the macroeconomy, as they not only change the private investment long-run average growth rate but also directly modify the behavior of monetary policy.JEL classifications: C34, E27, E44, E62
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