The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America
IMF Working Papers, June 13, 2018
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Bibliographic details
- Authors: Yan Carriere-Swallow, Antonio David, Daniel Leigh
- Published: June 13, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484361696.001
Summary of main findings
- The study estimates short-term effects of fiscal consolidation on economic activity in 14 countries in Latin America and the Caribbean.
- Fiscal consolidation has contractionary effects on GDP, consistent with a multiplier of 0.9.
- These estimated effects are close to those found in OECD countries based on a similarly constructed dataset (Devries and others, 2011).
- Estimation results for the effect of fiscal consolidation on the external current account balance are similar for Latin American emerging economies and OECD countries, providing support for the twin deficits hypothesis.
Methodology and dataset
- Changes in fiscal policy are identified by examining contemporaneous policy documents to isolate policy changes motivated by a desire to reduce the budget deficit rather than by responses to prospective economic conditions.
- The analysis is based on a narrative dataset constructed from those contemporaneous policy documents.
Policy-relevant implications
- Fiscal consolidation in the sampled emerging economies is associated with near-one-for-one negative impacts on GDP in the short term (multiplier = 0.9), implying that consolidation may substantially reduce output in the short run.
- The similarity of results between the Latin American sample and OECD samples suggests cross-group relevance of the estimated short-term fiscal multiplier and of the linkage between fiscal consolidation and external current account improvement (twin deficits).
Subjects and keywords (as stated)
- Balance of payments
- Current account balance
- Fiscal consolidation
- Fiscal multipliers
- Fiscal policy
- National accounts
- Private investment
- Caribbean
- consolidation package
- Current account balance
- emerging market economies
- estimation result
- exchange rate
- Fiscal policy policy change
- projection method
- propensity score weighting procedure
- real GDP
- spending shock
- taxation
- WP
Source: Yan Carriere-Swallow, Antonio David, and Daniel Leigh. "The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America", IMF Working Papers 2018, 142 (2018).