Fiscal Policy in Latin America over the Cycle

IMF Working Papers, April 16, 2014

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The paper provides an analysis of the cyclical stance of fiscal policy in Latin America.
Main contributions:
- Developing a new measure of the cyclicality of fiscal policy.
- Careful analysis of the statistical significance of results.
- Accounting for the effect of commodity prices on fiscal balances.
Key empirical finding:
- Fiscal policy has been procyclical on average in Latin America, but counter or acyclical in advanced economies.
Country-level pattern:
- Country-specific results are mostly insignificant, except in a few cases where policy is clearly procyclical.
- For some countries (Brazil, Chile, Colombia, El Salvador, and Mexico), there is evidence of a recent move toward more countercyclical policies.

New cyclicality measure:
- Takes into account both discretionary policy action and automatic stabilizers.
- Excludes additional revenues that are due to applying an unchanged average tax rate to nominal GDP in excess of potential.
Statistical approach:
- Emphasizes careful analysis of the statistical significance of results.
Treatment of commodity effects:
- Explicitly accounts for the effect of commodity prices on fiscal balances.

The average procyclicality of fiscal policy in Latin America implies limited automatic stabilization relative to advanced economies.
Recent movements toward more countercyclical policies in Brazil, Chile, Colombia, El Salvador, and Mexico suggest policy space or institutional change enabling less procyclical responses.

Subject: Automatic stabilizers, Commodity prices, Fiscal policy, Fiscal stance, Output gap, Prices, Production
Keywords include: Automatic stabilizers, commodity export, commodity price, commodity revenue, countercyclical fiscal policy, Fiscal policy, Fiscal stance, Latin America, Output gap, price index, revenue reform, significance of the commodity price index, spending, Sub-Saharan Africa, WP