Fiscal Policy and the Business Cycle Associated with Exchange Rate-Based Stabilizations: Evidence from Uruguay's 1978 and 1991 Programs

41 Pages Posted: 20 Apr 2011

See all articles by Ernesto Talvi

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES)

Date Written: November 1995

Abstract

The initial stages of exchange rate-based stabilizations have been generally characterized by a consumption boom, a deterioration of the trade balance and the current account, and an appreciation of the real exchange rate. It is only at the later stages that the economy falls into recession. Tax revenues are linked to consumption (through the VAT, sales taxes, and import tariffs), and the consumption boom should therefore generate an endogenous increase in tax revenues. Furthermore, since many countries that have attempted these programs were heavily indebted, the appreciation of the real exchange rate should generate an endogenous reduction in real interest payments. The endogenous improvement in the fiscal balance that may occur due to forces unleashed in the initial stages of an exchange rate-based stabilization program turn it into an inappropriate measure of fiscal performance. This paper documents the links between the business cycle associated with exchange-rate based stabilizations and the behavior of tax revenues, government expenditures, and the fiscal deficit.

Suggested Citation

Talvi, Ernesto, Fiscal Policy and the Business Cycle Associated with Exchange Rate-Based Stabilizations: Evidence from Uruguay's 1978 and 1991 Programs (November 1995). IDB Working Paper No. 257. Available at SSRN: https://ssrn.com/abstract=1815942 or http://dx.doi.org/10.2139/ssrn.1815942

Ernesto Talvi (Contact Author)

Centro de Estudios de la Realidad Economica y Social (CERES) ( email )

Antonio Costa 3476
11300 Montevideo
Uruguay
(5982)628-7703 / 628 76 44 (Phone)
(5982)622-0526 (Fax)

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