## 1. Real Effective Exchange Rate: Long-Run Estimates

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### Introduction and motivation
- Several emerging markets (EMs) have seen substantial currency appreciation, led by China, oil exporters, and Latin American countries.
- Drivers cited include terms of trade gains and, in some cases, large capital inflows; empirical evidence links monetary policy in major advanced economies to capital inflows.
- Export-oriented firms in key industrial and manufacturing sectors reported lost competitiveness from exchange rate appreciation.
- Prior literature on managing large capital inflows and appreciation pressures emphasizes that domestic macroeconomic policies should be appropriately set before resorting to capital controls, including fiscal consolidation.

### Research questions and data
- Empirical questions examined:
  - Whether fiscal adjustment can have a permanent effect on the real effective exchange rate (REER).
  - To what extent the composition of public spending matters for the REER.
- Data and empirical strategy:
  - Panel of 28 emerging market countries over 1983 to 2011.
  - Parsimonious model of the long-run REER estimated using panel dynamic OLS (DOLS).

### Key empirical findings
- Fiscal adjustment can reduce exchange rate appreciation pressures.
- Composition of fiscal adjustment matters:
  - Fiscal adjustment resulting from cuts in current spending is particularly effective in reducing appreciation pressures.
  - Fiscal adjustment achieved through reducing public investment would not be as effective.
  - Increases in public investment are associated with a decline in the real exchange rate (i.e., depreciation).
- Illustration for Brazil:
  - Increasing public investment reduces real appreciation only if financed by compositional shifts within the budget (for example, reducing government consumption to increase public investment).
  - Increasing public investment financed via additional public debt would not be as effective in reducing appreciation.

### Econometric specification and rationale
- Baseline long-run determinants of the REER:
  - Relative GDP per capita (GDPPC), measured relative to a weighted average of trading partners (expected positive correlation via Balassa-Samuelson).
  - Balance of goods and services (TB), measured in percent of GDP (expected negative relation).
  - Structural balance (SB): cyclically-adjusted balance of the non-financial public sector (hypothesis: higher SB associated with REER depreciation).
  - Relative public consumption (PC): government consumption in percent of GDP relative to trading partners (expected to raise REER).
  - Relative public investment (PI): government investment in percent of GDP relative to trading partners (ambiguous effect).
- Estimation approach:
  - Panel DOLS with leads and lags of first differences to address endogeneity and unit root properties.
  - Fixed effects to account for time-invariant country-specific factors.
  - Newey-West correction for standard errors.

### Econometric results — headline coefficients and interpretation
- Long-run impact of fiscal consolidation:
  - An improvement in the structural balance of 1 percent of GDP implies a depreciation of the real exchange rate of 1.7 percent (Table 1, columns 1 and 3).
  - Comparable result for advanced economies: Guajardo and others (2011) find a 1 percent of GDP consolidation associated with a 1.57 percent real depreciation.
- Composition effects:
  - Increase in relative government investment associated with real exchange rate depreciation in the long run.
  - Government consumption does not have a significant effect in the baseline specification (Table 1, columns 2 and 3).
- Robustness:
  - Controlling for outliers or including an Asia dummy yields similar baseline results; coefficient on investment only slightly smaller.
  - Using structural primary balance instead of overall structural balance: increase in structural primary balance associated with REER depreciation, though impact smaller.
  - Introducing capital inflows as control does not change results; capital inflows do not appear to affect the REER over the long term in preferred specifications.

### Quantitative illustration for Brazil
- Brazil context and magnitudes:
  - Public investment in Brazil is estimated at about 2½ percent of GDP; weighted average of its main trading partners is about 7½ percent of GDP.
  - A 1 percentage point increase in relative public investment for Brazil would mean increasing public investment by 7½ percentage points of GDP and would be associated with a depreciation in the real exchange rate of 12.6 percent (illustration based on estimated coefficients).
- Fiscal posture:
  - Since Fiscal Responsibility Law in 2000, Brazil maintained primary surpluses of around 3¼ percent of GDP.
  - Structural deficit has declined to about 3 percent of GDP after a large fiscal withdrawal in 2011, but remains larger than pre-crisis levels.
- Brazil simulation scenarios and simulated impacts:
  - Scenario 1:
    - Assumes Brazil improves the structural balance by 1 percent of GDP.
    - Public investment converges to the level of its Latin American peers.
    - Requires finding additional fiscal space of 2½ percent of GDP.
  - Scenario 2:
    - Assumes the same 1 percent of GDP improvement in the structural balance.
    - Public investment converges to the average in emerging markets.
    - Requires finding additional fiscal space of 3¼ percent of GDP.
  - Simulation result:
    - These scenarios imply that an appropriate combination of fiscal policy actions could, ceteris paribus, support a real depreciation in the range of 6¼ to 7¼ percent in the long term.
- Key comparative effect statement:
  - Both channels (increase in public savings and increase in public investment) have roughly the same impact on the REER: a 1.7 percent real depreciation from one channel is roughly the same effect but with an opposite sign as a corresponding 1 percent of GDP deterioration of the structural balance.
  - Implication: increasing public investment without offsetting reductions in current spending would likely have little effect on the REER.

### Brazil — budget composition, rigidities, and policy recommendations
- Fiscal composition and rigidities (Brazil, 2011 and trends):
  - Public consumption at 21¼ percent of GDP in 2011, one of the highest among emerging markets and almost double the level of Latin American peers.
  - Public consumption in percent of GDP has increased by 2 percentage points in Brazil since 2000, while most other emerging markets have seen declines.
  - Public investment about 2½ percent of GDP, less than half the average of other emerging markets and 70 percent below that of trading partners.
  - Current spending accounts for almost 90 percent of total spending.
  - Mandatory spending (at the federal level) accounts for ¾ of total spending.
  - Constitutional earmarks include at least 25 percent of tax revenue allocated to education, and 12 and 15 percent of states’ and municipalities’ tax revenues earmarked to health care services, respectively.
  - DRU (Desvinculação das Receitas da União) extended until 2015.
- Sources of rigidity:
  - Revenue earmarking focused on social sectors.
  - Mandatory spending guaranteed by the Constitution: revenue sharing; salaries and pensions; interest on and repayment of the public debt.
  - Indexation of minimum pensions to the minimum wage.
  - Congress designating multiple expenditure programs as “mandatory”.
- Consequences:
  - Rigidities discourage efficiency gains, perpetuate historical allocations, limit reallocation, contribute to procyclical spending, and reduce space for investment.
- Policy recommendations to create fiscal space:
  - Lower government consumption by reducing fiscal earmarking/mandates that lock current spending at high levels.
  - Combine reduced earmarking with more effective medium-term planning and rolling multi-year budget plans.
  - Strengthen costing, monitoring, and evaluation of public spending to increase its efficiency.
  - Ensure increases in public investment are financed by savings (reallocation), not by increasing the deficit.

### Financing public investment, PPPs, and project delivery
- Financing considerations:
  - Public investment reduces real appreciation only if financed by reallocation within the budget rather than by additional public debt.
  - Quasi-fiscal operations (e.g., interest subsidies on BNDES lending) lower net public saving and can increase contingent liabilities and risk premia.
  - Public–private partnerships (PPPs) and concessions could raise current account deficits and crowd out private investment if not accompanied by higher public savings.
- Implementation constraints:
  - Lack of capacity in planning and management, licensing delays, and procedural problems have resulted in long delays and poor execution of projects.
  - Improving project delivery and spending execution is essential.

### Caveats and limits to the analysis
- Large improvements in the structural fiscal position could increase investor confidence and generate capital inflows that appreciate the nominal exchange rate.
- Substantial increases in public investment could improve infrastructure and facilitate export expansion, which might mitigate REER channels.
- Empirical results suggest these offsetting effects have not been strong enough to dominate, but further research is warranted.

### Selected empirical estimates (highlights from Table 1)
- Structural balance (percent of GDP): coefficients reported include -0.018; -0.017; -0.018; -0.016.
- Relative government consumption (share of GDP): reported coefficients include -0.027; 0.164; 0.001; 0.119; 0.184.
- Relative government investment (share of GDP): reported coefficients include -0.044; -0.126; -0.114; -0.144; -0.129.
- Relative GDP per capita (log of real GDP per capita): coefficients reported include 0.127; -0.013; 0.139; 0.121; 0.161; 0.154.
- Balance of goods and services (share of GDP): coefficients reported include -0.303; -0.632; -0.198; -0.278; -0.076.
- Structural primary balance: -0.013 (in percent of GDP).
- Capital inflows (share of GDP): 0.095.
- R-squared values across specifications: 0.60, 0.44, 0.65, 0.54, 0.63, 0.65.
- Observations across specifications: 195, 564, 190, 190, 185, 145.
- Hausman tests indicate fixed effects preferred over random effects in the preferred specification.
- Significance indicators: ***, **, * denote significance at 1%, 5% and 10% respectively.

*Source: 1. Real Effective Exchange Rate: Long-Run Estimates (excerpts).*

### 1. Real Effective Exchange Rate: Long-Run Estimates ..................................................18

### 1. Real Effective Exchange Rate: Long-Run Estimates

### Introduction and motivation
- Several emerging markets (EMs) have seen substantial currency appreciation, led by China, oil exporters, and Latin American countries.
- Drivers cited include terms of trade gains and, in some cases, large capital inflows; empirical evidence links monetary policy in major advanced economies to capital inflows (see IMF 2011a and 2011b as cited).
- Export-oriented firms in key industrial and manufacturing sectors have complained about lost competitiveness from exchange rate appreciation.
- Prior literature on managing large capital inflows and appreciation pressures is noted (Gosh and others, 2008; Ostry and others, 2010; Ostry and others, 2011), with an overall conclusion that domestic macroeconomic policies should be appropriately set before resorting to capital controls, including fiscal consolidation.

### Research questions and data
- The paper examines empirically:
  - Whether fiscal adjustment can have a permanent effect on the real effective exchange rate (REER).
  - To what extent the composition of public spending matters for the REER.
- Empirical strategy:
  - Uses a panel of 28 emerging market countries over 1983 to 2011.
  - Estimates a parsimonious model of the long-run REER.

### Key empirical findings
- Fiscal adjustment can reduce exchange rate appreciation pressures.
- The composition of fiscal adjustment matters:
  - Fiscal adjustment that results from cuts in current spending is particularly effective in reducing appreciation pressures.
  - Fiscal adjustment achieved through reducing public investment would not be as effective.
  - Increases in public investment are associated with a decline in the real exchange rate (i.e., depreciation).
- Illustration using Brazil suggests that addressing public investment shortfalls could help reduce real appreciation, but financing matters:
  - Increasing public investment reduces real appreciation only if financed by compositional shifts within the budget (for example, reducing government consumption to increase public investment).
  - Increasing public investment financed via additional public debt would not be as effective in reducing appreciation.

### Case study: Brazil
- Justification for focus on Brazil:
  - Brazil experienced substantial REER appreciation over the last decade (Figure 2).
  - Brazil deployed multiple policy tools to manage capital inflows: nominal exchange rate appreciation, macro-policy adjustments, reserve accumulation, macroprudential measures (e.g., reserve requirements limiting short dollar positions of banks), and capital flow management measures (notably the tax on foreign purchases of domestic bonds and equities, “IOF”).
  - Despite these measures, the REER in Brazil remains somewhat overvalued, with the gap estimated at around 9 percent according to the latest External Balance Assessment (IMF, 2013a; and IMF, 2013b) as cited.
  - Public investment remains low in Brazil (particularly compared to other emerging markets), reflecting budget rigidities.
- Policy-relevant implication from Brazil: closing the public investment gap can help reduce real appreciation only if achieved through reallocation within the budget (reducing government consumption to raise public investment) rather than by increasing public debt.

### Figures and sample composition (as presented)
- Figure references in the source:
  - Figure 1: Emerging Markets: Real Effective Exchange Rate Appreciation (January 2007-December 2012, percent). Regional REERs weighted by market GDP. Countries in the sample by region include:
    - Asia excl. China: India, Indonesia, Malaysia, Philippines, and Thailand.
    - Oil exporters: Kazakhstan and Russia.
    - Latin America: Argentina, Brazil, Chile, Colombia, Mexico, and Peru.
    - Europe: Bulgaria, Hungary, Lithuania, Poland, Romania, and Turkey.
    - Other emerging: Jordan, Morocco, South Africa, and Ukraine.
  - Figure 2: Emerging Markets: Effective Exchange Rate Appreciation, 2002-12 (Percent). Sources: IMF Information Notice System; and IMF staff calculations.

### Policy implications (synthesis)
- Fiscal consolidation can be an effective tool to contain REER appreciation pressures when:
  - Consolidation is implemented through cuts in current spending rather than cuts in public investment.
  - Increases in public investment can reduce appreciation if financed by reallocation from current spending rather than by increasing public debt.
- Complementary policy tools (exchange rate management, reserve accumulation, macroprudential and capital flow measures such as IOF) have been used in practice (Brazil) but may not fully offset overvaluation without appropriate fiscal composition adjustments.

*Source: 1. Real Effective Exchange Rate: Long-Run Estimates (excerpts). PDF chapter content provided.*

### Section III describes the empirical specification and results and draw policy implications for

### _wp1401 - Section III describes the empirical specification and results and draw policy implications for

### Literature review: theoretical ambiguity and empirical inconclusiveness
- No consensus in theoretical literature on fiscal policy effects on the real exchange rate.
  - Keynesian models: expansionary fiscal shock raises demand for home goods and money, inducing real appreciation through higher interest rates and capital inflows or rising domestic prices (Mundell, 1963; Flemming, 1962). Sachs and Wyploz (1984) note the Mundell-Fleming framework may omit factors (growth of public debt; fiscal measures to service debt; wealth and portfolio implications of current account deficits; forward-looking expectations) that could reverse this result.
  - Real business cycle models: increases in government spending can trigger declines in private consumption and increased labor supply, leading to real appreciation (Backus, Kehoe and Kydland, 1994). Contrasting evidence: Ravn, Schmitt-Grohe, and Uribe (2007) — deep habit model where increased government spending lowers domestic markups relative to foreign markups, producing real depreciation.
  - Incomplete financial markets (Kollmann, 2010): government spending can create negative wealth effects, higher labor supply, strong supply-side response, deterioration of terms of trade and real depreciation; in bonds-only economies, persistent spending increases and/or inelastic labor supply can lead to real depreciation.
  - Composition matters: increases skewed toward nontradables → real appreciation; public investment effects ambiguous (Balassa-Samuelson mechanism can cause appreciation if tradable-sector productivity rises; opposite if nontradable-sector productivity rises; symmetric productivity increases → no REER impact). Chatterjee and Mursagulov (2012) find public investment can generate persistent, non-monotonic U-shaped real exchange rate adjustment.
- Empirical evidence is mixed and depends on methodology, specification, and sample.
  - Cardarelli, Elekdag, and Kose (2007): cross-section — countries responding to capital inflows with tighter fiscal policy (slower government expenditure growth) have more contained real appreciation and demand growth.
  - IMF (2008) and Ricci, Milessi-Ferreti, and Lee (2008): panel cointegration — increase in government consumption associated with REER appreciation. Guajardo, Leigh, and Pescatori (2011): historical approach — real exchange rate tends to depreciate in response to fiscal consolidation. IMF (2013c): fiscal balance effect on REER negative but coefficient small and generally not statistically significant.
  - Dynamic VAR studies: fiscal expansions in advanced economies associated with real depreciations (Kim and Roubini, 2008; Monacelli and Perotti, 2007).
  - Composition of spending: Galstyan and Lane (2009) — government consumption appreciates REER; government investment ambiguous. Caputo and Fuentes (2010) — both government consumption and public investment appreciate REER with long-run elasticity close to 1.

### Econometric evidence — Methodology
- Sample: 28 emerging market economies for the period 1983–2011.
- Baseline model relates the real effective exchange rate (REER) to five determinants:
  - Relative GDP per capita (GDPPC) in constant 2005 U.S. dollars, measured relative to a weighted average of trading partners. Expectation: positive correlation with REER (Balassa-Samuelson).
  - Balance of goods and services (TB), measured in percent of GDP. Expectation: negative relation with REER.
  - Structural balance (SB): cyclically-adjusted balance (excluding one-off adjustments) of the non-financial public sector. Hypothesis: higher SB associated with REER depreciation.
  - Relative public consumption (PC): government consumption in percent of GDP relative to weighted average across trading partners. Expectation: increase raises relative demand for nontradables → real appreciation.
  - Relative public investment (PI): government investment in percent of GDP relative to trading partners. Effect ambiguous (could appreciate if tradable productivity improves; depreciate if nontradable productivity improves; no effect if symmetric).
- Estimation approach: panel dynamic OLS (DOLS) following Ricci, Milessi-Ferreti, and Lee (2008) and Galstyan and Lane (2009). Model includes:
  - Long-run cointegrating coefficients vector β.
  - Leads and lags of first differences of determinants to address endogeneity and unit root properties.
  - Fixed effects to account for time-invariant country-specific factors.
  - Newey-West correction for standard errors due to induced serial correlation.
- Rationale for DOLS:
  - Limited sample length makes separate country equations imprecise.
  - Data series are non-stationary; DOLS handles cointegration and nonstationarity.

### Econometric evidence — Results (key findings)
- Fiscal policy has a significant effect on the REER.
  - Permanent fiscal adjustment: an improvement in the structural balance of 1 percent of GDP implies a depreciation of the real exchange rate of 1.7 percent over the long term (Table 1, columns 1 and 3).
    - Comparable result: Guajardo and others (2011) for advanced economies find a 1 percent of GDP consolidation associated with a 1.57 percent real depreciation.
  - Composition of spending matters:
    - Increase in relative government investment associated with real exchange rate depreciation in the long run.
    - Government consumption does not have a significant effect in the baseline specification (Table 1, columns 2 and 3).
- Illustration for Brazil:
  - A 1 percentage point increase in relative public investment in Brazil would mean increasing public investment by 7½ percentage points of GDP; such an increase would be associated with a depreciation in the real exchange rate of 12.6 percent.
    - (Context: Public investment in Brazil is estimated at about 2½ percent of GDP, while the weighted average of its main trading partners is about 7½ percent of GDP.)
- Contrast with advanced economies: findings differ where government consumption appreciates the real exchange rate and public investment ambiguous (Galstyan and Lane, 2009). Possible explanations for emerging market difference:
  - Public investment in emerging markets more likely to increase productivity in the nontradable sector due to lower infrastructure development.
  - Different composition of government spending: emerging markets have relatively higher public investment but lower public consumption compared to advanced economies.
- Robustness / sensitivity analyses:
  - Controlling for outliers (e.g., Asian emerging economies with large investment rates) yields similar baseline results; coefficient on investment only slightly smaller (Table 1, column 4). Including an Asia dummy yields same results.
  - Alternative fiscal measure: structural primary balance instead of overall structural balance — increase in structural primary balance associated with REER depreciation, though impact is smaller (Table 1, column 5).
  - Introduction of capital inflows as additional control does not change results (Table 1, column 6). Capital inflows do not appear to affect the REER over the long term whether using portfolio inflows or other inflows as preferred measure. (Alternative specification not reported: capital inflows have significant but relatively small impact on Brazil.)

### Implications for Brazil — fiscal posture, spending composition, and simulation
- Fiscal policy record:
  - Since Fiscal Responsibility Law in 2000, Brazil has maintained primary surpluses of around 3¼ percent of GDP, one of the highest among emerging markets (Figure 4).
  - Overall deficit remains relatively high because of large interest payments.
  - Large adjustment during 2002–2008 created buffers used during the crisis and in response to the sharp economic deceleration since 2011 in the form of discretionary stimulus.
  - Following a large fiscal withdrawal in 2011, the structural deficit has declined to about 3 percent of GDP, still larger than pre-crisis levels.
  - Further improvements likely require addressing budgetary rigidities.
- Composition of spending in Brazil (2011 data and trends):
  - Public consumption at 21¼ percent of GDP in 2011, one of the highest among emerging markets and almost double the level of Latin American peers.
  - Public consumption in percent of GDP has increased by 2 percentage points in Brazil since 2000, while most other emerging markets have seen declines.
  - Public consumption does not include transfers (where increases have been large).
  - Public investment in Brazil about 2½ percent of GDP, less than half the average of other emerging markets, and now 70 percent below that of trading partners (marked deterioration since 2000).
  - Evidence suggests reallocating spending could create some space for public investment and generate additional benefits.
- Simulation based on empirical results:
  - A 1 percent of GDP increase in public investment in Brazil would lead to a [text truncated in source at this point — simulation description begins but is not completed in supplied content].

*Source: _wp1401 - Section III describes the empirical specification and results and draw policy implications for*

### 1.7 percent real depreciation. However, this is roughly the same effect but with an opposite

### _wp1401 - 1.7 percent real depreciation. However, this is roughly the same effect but with an opposite

### Fiscal policy effects on the real effective exchange rate (REER)
- In emerging markets, fiscal policy affects the REER through two interrelated channels:
  - Increases in public savings (stronger structural fiscal position) could reduce real appreciation over the long term.
  - The composition of government spending matters: increases in public investment lead to a reduction in appreciation pressures.
- Both channels have roughly the same impact on the REER: a 1.7 percent real depreciation from one channel is roughly the same effect but with an opposite sign as a corresponding 1 percent of GDP deterioration of the structural balance.
- Implication: increasing public investment without offsetting measures to reduce current spending would likely have little effect on the REER.

### Brazil: Scenarios and simulated impacts
- Scenario 1:
  - Assumes Brazil improves the structural balance by 1 percent of GDP.
  - Public investment converges to the level of its Latin American peers.
  - Requires finding additional fiscal space of 2½ percent of GDP.
- Scenario 2:
  - Assumes the same 1 percent of GDP improvement in the structural balance.
  - Public investment converges to the average in emerging markets.
  - Requires finding additional fiscal space of 3¼ percent of GDP.
- Simulation result:
  - These scenarios imply that an appropriate combination of fiscal policy actions could, ceteris paribus, support a real depreciation in the range of 6¼ to 7¼ percent in the long term.

### Key country-specific fiscal statistics and facts (Brazil)
- Public investment was 2½ percent of GDP in 2011 (less than half the average of other emerging markets).
- Current spending accounts for almost 90 percent of total spending.
- Mandatory spending (at the federal level) now accounts for ¾ of total spending.
- Constitutional earmarks include at least 25 percent of tax revenue allocated to education, and 12 and 15 percent of states’ and municipalities’ tax revenues earmarked to health care services, respectively.
- An arrangement for withholding federal earmarked revenues (Desvinculação das Receitas da União, DRU) has been extended until 2015.

### Budget rigidities and constraints on reallocating resources
- Sources of rigidity:
  - Revenue earmarking focused on social sectors (education, health care, housing, social benefits).
  - Mandatory spending guaranteed by the Constitution: revenue sharing with states and municipalities; salaries and pensions for government employees; interest on and repayment of the public debt.
  - Indexation of minimum pensions to the minimum wage increasing social security pressures.
  - Congress designating multiple expenditure programs as “mandatory” in the Budget Guidance Law.
- Consequences of rigidities:
  - Rigidities discourage efficiency gains by perpetuating allocations based on historical spending and limit reallocation to changing needs.
  - They have contributed to procyclical spending, with revenue windfalls being spent due to earmarking.
  - They reduce the space for investment and complicate fiscal adjustment.
- Most promising route to create fiscal space:
  - Lowering government consumption by reducing fiscal earmarking/mandates that lock current spending at very high levels.
  - Priorities include:
    - (i) Reducing revenue-earmarking and mandatory spending in combination with more effective medium-term planning and rolling multi-year budget plans.
    - (ii) Strengthening the costing, monitoring, and evaluation of public spending to increase its efficiency.

### Financing public investment and related considerations
- Public investment increases would need to be financed by savings, not by increasing the deficit, to be effective in depreciating the REER.
- Financing investment through quasi-fiscal operations (e.g., policy lending to BNDES) has similar logic:
  - Interest subsidy on BNDES lending directly lowers net public saving.
  - An increase in contingent liabilities could gradually push up risk premia.
- Public–private partnerships (PPPs) and concessions:
  - Could result in higher current account deficits and crowding-out of private investment if not accompanied by increases in public savings.
- Improving project delivery and spending execution is essential:
  - Lack of capacity in planning and management, difficulties in obtaining licenses, and procedural problems have resulted in long delays historically.

### Caveats and limits to the analysis
- Strong improvement in Brazil’s structural fiscal position could increase investor confidence and generate greater capital inflows that lead to an appreciation of the nominal exchange rate.
- Substantial increases in public investment could improve infrastructure and facilitate export expansion; these effects might mitigate the REER channels analyzed.
- The paper’s empirical results suggest these offsetting effects have not been strong enough to dominate, but they warrant further research.

### Empirical estimates: long-run determinants of the REER (selected results)
- Table 1 coefficients (dependent variable: log of the real effective exchange rate). Structural balance is percent of GDP; relative government consumption and investment are shares of GDP; rel. GDP per capita is log of real GDP per capita; balance of goods and services is share of GDP.
  - Structural balance: -0.018; -0.017; -0.018; -0.016 (standard errors/significance shown in source).
  - Relative government consumption: coefficients include -0.027; 0.164; 0.001; 0.119; 0.184 (various specifications).
  - Relative government investment: coefficients include -0.044; -0.126; -0.114; -0.144; -0.129 (statistical significance indicated in source).
  - Relative GDP per capita: 0.127; -0.013; 0.139; 0.121; 0.161; 0.154 (various specifications).
  - Balance of goods and services: -0.303; -0.632; -0.198; -0.278; -0.076 (various specifications).
  - Structural primary balance: -0.013 (in percent of GDP).
  - Capital inflows: 0.095 (share of GDP).
  - R-squared values across specifications: 0.60, 0.44, 0.65, 0.54, 0.63, 0.65.
  - Observations across specifications: 195, 564, 190, 190, 185, 145.
- Notes: Hausman tests indicate fixed effects are more appropriate than random effects in the preferred specification. Asterisks ***, **, * indicate significance at 1%, 5% and 10% respectively.

*Italic: Source — IMF World Economic Outlook; staff calculations; and authors' analysis as presented in the PDF content unit.*

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