Recent developments in fiscal response with an application to Costa Rica

Abstract

This paper uses the framework of Fiscal Response Models to analyse the impact of foreign assistance on recipient government's behaviour. Such models provide a means of examining the impact of aid on taxation and expenditure decisions. In the theoretical model presented here foreign aid has been endogenized to account for the fact that governments have some in¯uence over the amount of aid committed to the country, and considerable in¯uence over disbursements. Thus, ®scal planning will be based on targets for expenditures and revenues, the latter including aid. This permits a more complete examination of the eects of aid on government ®scal behaviour than do standard fungibility models. The model is illustrated in an application to Costa Rica, where the eect of aid on government allocation of resources appears to have been negligible.

Aid and fiscal policy in Nicaragua: A fiscal response analysis

“…Regarding the limits imposed to the government in the allocation of different revenue categories to consumption, the estimates of the rs indicate that 68 per cent of tax and other recurrent revenue is consumed. This figure is almost equal to the estimate of McGillivray and Ahmed (1999) for the Philippines (67 per cent), higher than that estimated by Franco-Rodriguez (2000) for Costa Rica (54.9 per cent), and lower than the estimate of Franco-Rodriguez et al (1998) for Pakistan (85 per cent). The estimates of McGillivray and Ouattara (2005) for Cote d'Ivoire and of Ouattara (2006) for Senegal are much lower (28.5 and 14 per cent, respectively).…”

“…This is not the case either in Franco-Rodriguez et al (1998) or McGillivray and Ahmed (1999). In addition, these two papers set the target for borrowing at zero, which seems mistaken as noted by Franco-Rodriguez (2000), especially when the government has been highly indebted in the past. But the latter author estimates public borrowing targets following the same co-integration approach applied in the estimation of the targets of government consumption and investment, and tax and other recurrent revenue.…”

Africa: Out of debt, into fiscal space? Dynamic fiscal impact of the debt relief initiatives on African Heavily Indebted Poor Countries (HIPCs)

“…Contrary to the standard "aid -growth" literature, these models explicitly acknowledge that aid is given primarily to the government, and that hence any impact of aid on the economy will depend on government behavior, in particular how fiscal decisions on taxation and expenditure are affected by aid revenues (Franco-Rodriguez et al [21,22]). In particular, we focus on the fiscal response effects of debt relief as an alternative instrument of aid delivery on three important fiscal variables.…”

Fiscal Responses to Privatisation in Transition Economies: an Empirical Assessment

“…To do so, one of the most widely used methods in the fiscal response literature is to define cointegrating equations for each variable making use of both statistical methods (cointegration tests) and economic theory. Then, the predicted values from the cointegrating relations are used as a proxy for the targets (Franco‐Rodriguez, ; Feeny and McGillivray, ; Ouattara, , ). This study follows the conventional method in the fiscal response literature.…”