Challenges of Fiscal Policy in Emerging and Developing Economies

38 Pages Posted: 27 Jun 2016

See all articles by Raju Huidrom

Raju Huidrom

World Bank

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Franziska Ohnsorge

World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: June 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: developing economies, expenditure frameworks, fiscal rules, Fiscal space, growth slowdown, stabilization funds

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 2016). CEPR Discussion Paper No. DP11347, Available at SSRN: https://ssrn.com/abstract=2801008

Raju Huidrom (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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