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Unformatted text preview: sing instrumental variables. We instrument for the lagged dependent variable and the output gap with actual and lagged values of the foreign output gap, lagged domestic output gap, actual and lagged values of international oil prices. 124 99 for the cyclical behavior and the responsiveness of fiscal policies to debt levels to vary from the 1990‐
2002 to the 2003‐2008 period. As dependent variables we first use cyclically adjusted fiscal outcomes, so as to capture the behavior of the discretionary component of fiscal policy which responds endogenously to the economic cycle. Alternatively, we use the component of fiscal policy that is linked to automatic stabilizers. Moreover, to capture the joint effect of endogenous discretionary policies and automatic stabilizers, we repeat our analysis with actual values of fiscal outcomes as dependent variables. Our main findings are, first, that after 2002 fiscal policies have become sensitive to long term sustainability considerations, even when controlling for the effect of increasing commodity prices. Thus, observed fiscal balances and their discretionary component have tended to significantly rise (fall) in response to increases (reductions) in the level of Government debt (Table 1).127 Our second main finding is that during the present decade Latin America’s fiscal policies have continued to behave in a pro‐
cyclical way, being expansionary in countries experiencing booms and contractionary in those going through downturns.128 Policy reactions to the state of the business cycle, however, are statistically significant only for observed government expenditures – not for primary balances or for government revenues. Third, looking in more detail at the region’s endogenous discretionary policies, we find that the cyclically‐adjusted component of government revenues tends to behave in a counter‐cyclical manner, while that of government expenditures is significantly pro‐cyclical. Not surprisingly, the behavior of the structural primary balance is a‐cyclical. Fourth, with regard to the automatic stabilizer component of fiscal policies, we find that it is significantly pro‐cyclical for government revenues and the primary balance but counter‐cyclical in the case of government expenditures. Fifth, the behavior of government expenditures is dominated by their pro‐cyclical discretionary component, which more than compensates for their counter‐cyclical automatic stabilizer element. And sixth, government revenues appear to be dominated by their pro‐cyclical automatic component, which more than compensates for counter‐
cyclical discretionary policy changes. There are, however, some notable differences between the behavior of fiscal policies across the group of 7 largest LAC countries and the rest of the region. 129 As illustrated in Figure 4, the discretionary component of government expenditures is relatively more pro‐cyclical in LAC7, while that of government revenues and primary balanc...
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