Mexico needs a fiscal twist: Response to Covid-19 and beyond

Swarnali Hannan, Keiko Honjo and Mehdi Raissi

International Economics, 2022, vol. 169, issue C, 175-190

Abstract: Mexico's fiscal response to the pandemic has been modest compared to its peers, reflecting the authorities' desire to not issue new debt for spending. This approach, however, resulted in a more severe recession in 2020 and a weaker economic recovery, notwithstanding spillovers from the United States. Balancing the need for stronger near-term fiscal support for the people and the recovery against medium-term discipline, this paper lays out an alternative strategy. We show that credibly announcing a pro-growth and inclusive medium-term fiscal reform upfront—including increased tax capacity, higher public investment and strengthened social safety nets—would open space for larger short-term support and close medium-term fiscal gaps. Model simulations suggest that this package would boost output, limit lasting economic damage from the pandemic, and put debt trajectory on a declining path in the medium term as tax reforms pay off and risk premia decline.

Keywords: Covid-19; Fiscal response; Tax; Social safety nets; General equilibrium model (search for similar items in EconPapers)
JEL-codes: E2 E6 H2 H5 H6 O54 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Mexico needs a fiscal twist: Response to Covid-19 and beyond (2022)
Working Paper: Mexico Needs a Fiscal Twist: Response to Covid-19 and Beyond (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:169:y:2022:i:c:p:175-190

DOI: 10.1016/j.inteco.2022.01.004

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