Building Countercyclical Fiscal Policies in Latin America: The International Experience

Abstract

This paper reviews the international experience of developed and underdeveloped economies in reducing the pro-cyclicality and deficit bias of fiscal policies and promoting the adoption of effective countercyclical fiscal policy actions. The paper draws lessons and best international practices for building fiscal policy frameworks and adopting feasible countercyclical fiscal policies in Latin America. The authors review the main arguments regarding the proper role and limitations of countercyclical fiscal policies, and offer an evaluation of the international evidence demonstrating the typical pro-cyclicality and deficit bias of fiscal policy. The paper analyzes the international experience with fiscal frameworks, budgetary rules, and other mechanisms for implementing countercyclical fiscal policies, and describes the necessary preconditions for building a stable and effective countercyclical fiscal policy framework in Latin America. The authors review the international best practices for establishing a reliable and effective countercyclical fiscal policy in the region.

Keywords: Economic Stabilization, Debt Markets, Public Sector Expenditure Policy, Fiscal Adjustment, Subnational Economic Development