Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia

Abstract

This paper relates to the literature on the possible effect of inflation targeting on fiscal discipline in developing countries. In particular, we present empirical evidence to address this issue based on the Colombian experience. This study relies on two main issues. The first is to verify whether the adoption of inflation targeting in Colombia affected the discretionary fiscal component in the period 2004–2014. The second issue is to analyze whether the monetary credibility amplified the effect of the monetary policy on changes in the discretionary fiscal component. The results denote that inflation targeting causes an impact on fiscal policy in Colombia. In particular, the greater monetary credibility the less change in discretionary fiscal component is observed.