Debt Sustainability and Procyclical Fiscal Policies in Latin America

36 Pages Posted: 18 May 2006

See all articles by Enrique Alberola

Enrique Alberola

Bank for International Settlements (BIS)

Jose Manuel Montero

Banco de España

Date Written: May 11, 2006

Abstract

The computation of structural primary balances for the nine main Latin American countries and their comparison of their changes with their cyclical position during the period 1981-2004 confirms that fiscal policy is procyclical in the region. From this evidence, the paper shows strong evidence that the fiscal behaviour is closely linked to the financial vulnerability position of the economies and in particular to the perception on the sustainability of debt. The current threshold balance, defined as the primary balance which would render the debt stable under the existing economic and financial conditions, is used as our gauge for measuring debt sustainability at each point in time. The empirical analysis reveals that the fiscal stance tightens when the debt sustainability perceptions worsen, and that this effect is stronger the less sustainable debt is perceived. The results are robust to different specifications and estimation methods.

Keywords: procyclical fiscal policy, debt sustainability

JEL Classification: H6, E6, F3

Suggested Citation

Alberola, Enrique and Montero, Jose Manuel, Debt Sustainability and Procyclical Fiscal Policies in Latin America (May 11, 2006). Banco de Espana Research Paper No. WP-0611, Available at SSRN: https://ssrn.com/abstract=903066 or http://dx.doi.org/10.2139/ssrn.903066

Enrique Alberola (Contact Author)

Bank for International Settlements (BIS) ( email )

Ruben Dario 281
Polanco, Miguel Hidalgo
Mexico City, 11580
Mexico

HOME PAGE: http://www.bis.org/author/enrique_alberola-ila.htm

Jose Manuel Montero

Banco de España ( email )

Madrid 28014
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
142
Abstract Views
1,445
rank
255,752
PlumX Metrics