The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America

By Yan Carriere-Swallow, Antonio David, Daniel Leigh

June 13, 2018

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Yan Carriere-Swallow, Antonio David, and Daniel Leigh. The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America, (USA: International Monetary Fund, 2018) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We estimate the short-term effects of fiscal consolidation on economic activity in 14 countries in Latin America and the Caribbean. We examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Based on this narrative dataset, our estimates suggest that fiscal consolidation has contractionary effects on GDP, consistent with a multiplier of 0.9. We find these effects to be close to those in OECD countries based on a similarly constructed dataset (Devries and others, 2011). We also find similar estimation results for the two groups of economies for the effect of fiscal consolidation on the external current account balance, providing support for the twin deficits hypothesis.

Subject: Balance of payments, Current account balance, Fiscal consolidation, Fiscal multipliers, Fiscal policy, National accounts, Private investment

Keywords: Caribbean, Consolidation package, Current account balance, Emerging market economies, Estimation result, Exchange rate, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Fiscal policy policy change, Private investment, Projection method, Propensity score weighting procedure, Real GDP, Spending shock, Taxation, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/142
Stock No:

WPIEA2018142
ISBN:

9781484361696
ISSN:

1018-5941

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