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FISCAL POLICY THROUGHOUT THE BUSINESS CYCLE: THE COLOMBIAN EXPERIENCE

Ignacio Lozano-Espitia and Jorge Hernán Toro-Córdoba

Revista ESPE - Ensayos sobre Política Económica, 2007, vol. 25, issue 55, No 55, 12-39

Abstract: This paper reviews the close relationship between business cycle and public fi nances in Colombia. The international evidence shows that cyclical movements in output systematically affect the balance of public fi nances. Therefore, the assessment of cyclical and structural components of the budget balance becomes an important tool in the analysis of fi scal policy, because it may allow fi scal authorities to determine the extent to which the fi scal stance in a particular year refl ects their discretionary actions. Our fi ndings indicate that the cyclical component of the central government balance in Colombia has been fairly small in recent times (for about 10% of the overall defi cit). Governments are not usually neutral during the business cycle. Ideally, they ought to practice a countercyclical fi scal policy to moderate the magnitude of output fl uctuations. However, in emerging economies, countercyclical fi scal policies are inhibited by domestic and external factors. Using a standard reduced form model closely connected to the government budget constraint, we fi nd that fi scal policy in Colombia has been procyclical over the last 45 years or so, with the primary surplus falling (and the defi cit rising) as a share of GDP by approximately 1/5th of a percentage point when the output gap increases by one percentage point.

Keywords: Fiscal Policy; Business Cycle; Stabilization; Defi cit; Budget (search for similar items in EconPapers)
JEL-codes: E62 E32 E63 H62 H61 (search for similar items in EconPapers)
Date: 2007
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