A New Action-based Dataset of Fiscal Consolidation in Latin America and the Caribbean

Abstract

This paper presents a new database of fiscal consolidations for 14 Latin American and Caribbean economies during 1989-2016. We focus on discretionary changes in taxes and government spending primarily motivated by a desire to reduce the budget deficit and long-term fiscal health and not by a response to prospective economic conditions. To identify the motivation and budgetary impact of the fiscal policy changes, we examine contemporaneous policy documents, including Budgets, central bank reports, and IMF and OECD reports. The resulting series can be used to estimate the macroeconomic effects of fiscal consolidation for these economies.

The Rewards of Fiscal Consolidation

“…For a panel of Advanced Economies (AEs), Guajardo, Leigh, and Pescatori (2014) find that consolidations in economies with highperceived sovereign risk are less contractionary, which constitutes indirect evidence that confidence effects are at play. This finding is broadly confirmed for the sample of Latin American countries analyzed by Carrière-Swallow, David, and Leigh (2018). Beetsma et al (2015) extend the Guajardo, Leigh, and Pescatori data at a monthly frequency and find that fiscal consolidations affect consumer and business confidence negatively.…”

“…Furthermore, we also discard fiscal measures that are estimated to be revenue neutral, such as measures that simply shift the tax burden across tax payers or tax hikes that are introduced to compensate for cuts elsewhere. Moreover, we cross-checked the announcements identified in this manner against the information contained in the database constructed by David and Leigh (2018), including the endogenous policy actions described in the footnotes of that paper.…”

Fiscal Policy Multipliers in Small States

“…The second approach, known as a narrative approach, utilizes the news and budget documents to identify unexpected fiscal spending shocks by dropping the incidences of government spending increases in response to current or prospective economic conditions (e.g. Romer andRomer, 2010, David andLeigh, 2018). However, for this narrative approach, data is not available for most small states.…”

“…For broader categories of countries, including some small states, the IMF Regional Economic Outlook (REO) (2018), for instance, estimates fiscal multipliers for Latin America and the Caribbean (LAC) countries and showed that fiscal multipliers are between 0.5 and 1.1 using a narrative approach, SVAR, and forecasting error methods. Their narrative approach estimation uses annual data for the sample of 14 Latin American and Caribbean (LAC) countries between 1989 and 2016 and uses the fiscal consolidation episodes from David and Leigh (2018). 17 Their SVAR approach estimates fiscal multiplier country-by-country using quarterly data from eight LAC countries.…”

Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations

“… Mertens and Ravn (2012) show that anticipated and unanticipated changes in tax policy can have distinct macroeconomic effects.3 Other authors have recently extended it to tax changes in other countries, such as Cloyne (2013) andCloyne et al (2018) for the United Kingdom,Uhl (2013) andGechert et al (2016) for Germany, Coutinho Pereira and Wemans (2015) for Portugal,Gil et al (2018) for Spain,Lopes (2015) for Canada, andDavid and Leigh (2018) for Latin American and Caribbean countries.4 Recent contributions to the broader literature on fiscal multipliers include Ramey and Zubairy (2018),Jordà and Taylor (2016),Guajardo et al (2014),Mertens and Ravn (2014),Nakamura and Steinsson (2014) andAuerbach and Gorodnichenko (2012). Ramey (2011) provides a comprehensive survey of the earlier fiscal multiplier literature.3©International Monetary Fund.…”