Fiscal Policy in Latin America

Abstract

Fiscal policy in Latin America has been understudied, in part because of inadequate data. This paper utilizes a new, comprehensive database on fiscal outcomes in 13 major Latin American economies which covers central government, local government, and nonfinancial public enterprises at a reasonably detailed level of aggregation. Armed with this database, we lay out some basic facts about fiscal policy in Latin America. We find stark differences between fiscal outcomes in Latin America and in industrial countries. Fiscal outcomes have been far more volatile in Latin America. In sharp contrast to the industrial economies, fiscal policy in Latin America has also been procyclical, casting doubt on the applicability of the Barro (1979) tax-smoothing hypothesis to Latin America. We discuss alternative explanations of fiscal policy procyclicality. We also consider the relationship of fiscal policy to the exchange-rate regime. Contrary to much conventional wisdom, we find no evidence that fixed exchange rates impose greater discipline on fiscal policy. We also find that fiscal expansions in Latin America have been significantly associated with exchange-rate collapses.