Fiscal Stimulus and Credibility in Emerging Countries

May 1, 2010

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Format: Chicago

Magda E. Kandil, and Hanan Morsy. Fiscal Stimulus and Credibility in Emerging Countries, (USA: International Monetary Fund, 2010) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Across a sample of thirty four emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for countercyclical policy increases with the availability of international reserves as it enhances credibility and mitigates concerns about the effect of expansionary fiscal policy on the cost of borrowing and debt service. The paper also examines the effectiveness of the fiscal policy in emerging countries in the short- and long-run and its underlying conditions, which does not appear to be uniform. In some cases, contractionary fiscal policy could stimulate growth in the short-run, if fiscal tightness lowers the cost of borrowing and debt service, and mitigates concerns about debt sustainability. However, an increase in international reserves is evident to mitigate these concerns. On the other hand, high inflation increases concerns about the impact of fiscal spending on inflationary expectations and the cost of borrowing, countering the effectiveness of the fiscal stimulus on output growth in the short-run. Where the debt burden is high, fiscal expansion has a longlasting negative effect on real growth.

Subject: Central banks, Exchange rate arrangements, Fiscal policy, Fiscal stimulus, Foreign exchange, International reserves, Production, Production growth

Keywords: Credibility, Cyclicality, Debt ratio, Effectiveness, Emerging markets, Exchange rate, Exchange rate appreciation, Exchange rate arrangements, Fiscal policy transmission, Fiscal stimulus, Global, Government spending, Government spending shrink, International reserves, Output gap, Production growth, Quality government spending, Regime dummy, Reserve, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/123
Stock No:

WPIEA2010123
ISBN:

9781455200825
ISSN:

1018-5941

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