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Unformatted text preview: en the result of sound macroeconomic and financial policy frameworks as well as better debt management practices involving improvements in currency and term composition. Moreover, countries have adopted more flexible and credible monetary policy frameworks; they have increased substantially their level of reserves, shifted to current account surpluses (or lower deficits) and deepened their local currency debt markets. Figure 2 also presents the region’s actual and cyclically‐adjusted structural primary balances, both measured as shares of GDP.124 During most of the past two decades differences between these two variables have been very small, which is consistent with previous evidence on the relative weakness of Latin American automatic stabilizers – which can be approximated as the difference between actual fiscal outcomes and their structural counterparts.125 The main exceptions are the years 2000 and 2003, in which automatic stabilizers appear to have contributed to reducing the volatility of the region’s fiscal policy: operating in an expansionary fashion when cyclically‐adjusted balances were being increased (in 2000) and in a contractionary way when structural balances were being reduced (in 2003). In addition, Figure 2 shows that after a decline during the second half of the 1990s, structural primary balances rose by about 3 percentage points between 1998 and 2008. This fiscal improvement was not driven, however, by an increased ability of governments to resist political pressures to increase primary expenditures. Instead, it can attributed largely to improvements in debt management and the fact that rising fiscal revenues, associated to a large extent to rapidly increasing commodity prices, were able to outgrow primary expenditures (Figure 3). Still, higher structural balances allowed governments to increase their emphasis on social spending, including on education, health and targeted transfers. And fiscal policies have become more sustainable, even while remaining pro‐cyclical In order to assess the extent to which the above policy changes altered the cyclical properties of the region’s fiscal policies, we use data for 17 LAC countries for the period 1990‐2008. We summarize the behavior of fiscal policy by estimating a fiscal policy rule in which primary balances – or alternatively government revenues or expenditures – depend on a measure of the state of the cycle, measured through the output gap, and the lagged value of the economy’s total debt as a share of GDP.126 We allow 123 See Perry (2007). The construction of the structural balance follows the OECD methodology as outlined by Fatas and Mihov (2009). 125 See Suescun (2007) for evidence on the weakness of the region’s automatic tax stabilizers, in comparison with industrial countries, which the author attributes to the relatively smaller size of LAC governments and the smaller share of income taxes found in this region. 126 We closely follow the methodology proposed by Fatas and Mihov (2009) and correct for the possibility of reverse causality from fiscal policy to the level of economic activity u...
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This document was uploaded on 11/14/2013.

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