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

43 Pages Posted: 1 Aug 2018

See all articles by Yan Carriere-Swallow

Yan Carriere-Swallow

International Monetary Fund (IMF)

Antonio C. David

World Bank - Policy Research Department; International Monetary Fund (IMF)

Daniel Leigh

International Monetary Fund (IMF)

Date Written: June 2018

Abstract

We estimate the short-term effects of fiscal consolidation on economic activity in 14countries 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.

Keywords: Fiscal consolidation, Fiscal policy, Taxation, Emerging markets, Latin America, emerging market economies, General

JEL Classification: E62, H20, H50, H60

Suggested Citation

Carriere-Swallow, Yan and David, Antonio C. and Leigh, Daniel, The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America (June 2018). IMF Working Paper No. 18/142. Available at SSRN: https://ssrn.com/abstract=3221230

Yan Carriere-Swallow (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Antonio C. David

World Bank - Policy Research Department ( email )

1818 H Street
Washington, DC 20433
United States

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Daniel Leigh

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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