Challenges of Fiscal Policy in Emerging and Developing Economies

37 Pages Posted: 16 Jun 2016

See all articles by Raju Huidrom

Raju Huidrom

World Bank

M. Ayhan Kose

Development Prospects Group at the World Bank

Franziska Ohnsorge

World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: June 15, 2016

Abstract

This paper presents a systematic analysis of the availability and use of fiscal space in emerging and developing economies. These economies built fiscal space in the run-up to the Great Recession of 2008-09, which was then used for stimulus. This reflects a more general trend over the past three decades, where availability of fiscal space has been associated with increasingly countercyclical (or less procyclical) fiscal policy. However, fiscal space has shrunk since the Great Recession and has not returned to pre-crisis levels. Emerging and developing economies face downside risks to growth and prospects of rising financing costs. In the event that these cause a sharp cyclical slowdown, policymakers may need to employ fiscal policy as a possible tool for stimulus. An important prerequisite for fiscal policy to be effective is that these economies have the necessary fiscal space to employ countercyclical policies. Over the medium-term, credible and well-designed institutional arrangements, such as fiscal rules, stabilization funds, and medium-term expenditure frameworks, can help build fiscal space and strengthen policy outcomes.

Keywords: Fiscal Space, Fiscal Policy, Developing Economies, Growth Slowdown, Fiscal Rules, Stabilization Funds, Expenditure Frameworks

JEL Classification: E62, H50, H60

Suggested Citation

Huidrom, Raju and Kose, M. Ayhan and Ohnsorge, Franziska, Challenges of Fiscal Policy in Emerging and Developing Economies (June 15, 2016). CAMA Working Paper No. 34/2016 . Available at SSRN: https://ssrn.com/abstract=2796384 or http://dx.doi.org/10.2139/ssrn.2796384

Raju Huidrom

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose (Contact Author)

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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