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This paper is an empirical investigation of sources of fiscal variability in a sample of 27 Latin American and Industrialized countries. The objective is to show that the structural and political characteristics of countries are a major determinant of volatility. Gavin et al. (1997) reveal that “the most striking difference between fiscal aggregates in Latin American and industrialized countries is not in their first moment, but in their volatility”. The authors show that over the period 1970-1995, fiscal revenues were three times more volatile in Latin America than in industrialized countries. This ratio reaches four for fiscal expenditures and five for fiscal transfers. In another paper, Gavin and Perotti (1997) highlight that “the change in fiscal variables is the sum of two components: the first rejects the automatic adjustment of the fiscal variable to the underlying economic environment, while the second is the discretionary change implemented by the policy makers”. The authors also found evidence that fiscal policy is procyclical in Latin America while it is countercyclical in industrialized countries. Exogenous macroeconomic shocks are amplified by the procyclicality of Latin American economies, which translates in highly volatile fiscal aggregates. The procyclicality is believed to be caused by structural characteristics of these economies such as the limited development of domestic financial systems, the lack of access to the international financial markets and the composition of the budget.

However, their analysis remains mostly descriptive, and lacks empirical support. This paper’s contribution to the existing body of research is two fold. First it extends previous research by introducing a larger set of variables to explain the volatility of fiscal aggregates. In the analysis, three sets of regressors are considered. One captures shocks to the economy. The second examines structural characteristics of countries, and seeks to analyze the extent to which the depth of the domestic financial system, the access to the international capital market and the structure of fiscal revenues and expenditures cause unstable fiscal outcomes. The third set of regressors investigates the relationship between institutional and political variables and fiscal volatility. The second contribution of this paper is that it introduces a new estimation that takes into account the time series dimension of the data. The paper is organized as follows. Section2 summarizes the evidence of the higher volatility of fiscal aggregate in Latin America. Section 3 defines the sets of regressors derived from analyzing the possible causes of volatility. Section 4 presents the estimation method and the results.