Fiscal policy and economic adjustment in emerging economies: what happens after the economic reforms?

Domenica Tropeano

No 30-2006, Working Papers from Macerata University, Department of Finance and Economic Sciences

Abstract: Fiscal reform in developing countries has succeeded in increasing tax revenue from indirect taxes. Here it is assumed that those taxes will be transferred backwards to wages rather than forward to prices. This implies a certain degree of flexibility of nominal wages, which, however is not so unrealistic in informal sectors. Under these assumptions it is shown how some simple fiscal policies, such as a balanced budget expansion or an adjustment to a shock to the current account, work. The adjustment to a shock to the current account under the rule of balanced budget appears particularly painful under these assumptions.

Keywords: income distribution.; Fiscal policy; multiplier; developing countries; tax shifting; Latin America (search for similar items in EconPapers)
Date: 2006-10, Revised 2008-11
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