Debt Sustainability and Procyclical Fiscal Policies in Latin America

Alberola, Enrique; Montero, José María

doi:10.2139/ssrn.903066

Cited by 34 publications

(35 citation statements)

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“…Access to credit markets is therefore an important determinant of fiscal policy in developing countries . This argument is supported by Alberola and Montero () who posit that public debt sustainability accounts for the whole procyclical fiscal policy in Latin America. This might therefore explain similar results for developing countries in general.…”

Section: Introductionmentioning

confidence: 84%

The Fiscal Policy Response to Public Debt in Developing Countries

Small¹,

Brown

Canavire‐Bacarreza

2019

Contemporary Economic Policy

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Theoretical models on fiscal sustainability hypothesize that indebted governments can lower their current debt by generating future primary surpluses, ceteris paribus. While both developed and developing countries struggle with the issue of debt stabilization, the latter, in particular face heightened sensitivity from creditors, which provides them an impetus to respond more strongly to stabilize their debt. Based on a panel of 53 developing countries, we examine the fiscal response of these countries to changes in their debt‐to‐gross domestic product ratio. We find evidence of a positive relationship between the debt and primary surplus and that countries adjust along both the revenue and expenditure margins at roughly the same rate. (JEL E62, H50, O11)

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Section: Introductionmentioning

confidence: 84%

The Fiscal Policy Response to Public Debt in Developing Countries

Small¹,

Brown

Canavire‐Bacarreza

2019

Contemporary Economic Policy

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“…We discuss these issues in Section 6. 2 Riascos and Végh (2003) and Caballero and Krishnamurthy (2004) emphasize market incompleteness and Alberola and Montero (2006) argue that procyclicality is linked to the perception of sustainability of public debt.…”

Section: Introductionmentioning

confidence: 99%

Procyclicality or Reverse Causality?

Jaimovich

Panizza

2007

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, InterAmerican Development Bank. Terms of use: Documents inThe Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res. 3 Abstract *There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear. JEL Codes: E62, E32, H62

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“…Empirical studies tend to reflect fiscal behavior in large Latin American countries rather than small island states in the Caribbean. A few studies focusing on Latin America and the Caribbean obtain evidence of weak fiscal policy response to an increase in the debt-to-GDP ratio (Kufa, Pellechio, and Rizavi, 2003;Alberola and Montero, 2006;SELA, 2013;Campo-Robledo and Melo-Velandia, 2015;Khadan, 2019;Kemoe and Lonkeng, 2020). Similarly, analyzing the cyclical stance of fiscal policy in Latin America and the Caribbean, Daude, Melguizo, and Neut (2011), Klemm (2014) and Alberola and others (2016) find that fiscal policy is procyclical on average.…”

Section: Related Literaturementioning

confidence: 99%

Riding the Storm

Cevik

Nanda

2020

IMF Working Papers

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Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.

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Debt Sustainability and Procyclical Fiscal Policies in Latin America

Cited by 34 publications

References 34 publications

The Fiscal Policy Response to Public Debt in Developing Countries

The Fiscal Policy Response to Public Debt in Developing Countries

Procyclicality or Reverse Causality?

Riding the Storm

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