Fiscal Policy Effects and Capital Mobility in Latin American Countries

Jose U Mora Mora () and Rafael A Acevedo ()
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Jose U Mora Mora: Pontificia Universidad Javeriana – Cali, Colombia, Postal: Pontificia Universidad Javeriana - Cali, Cali/Valle del Cauca, Colombia
Rafael A Acevedo: Texas Tech University, USA, Postal: Free Market Institute. Texas Tech University, Lubbock / Texas, United States

Journal of Economic Integration, 2019, vol. 34, issue 1, 159-188

Abstract: This paper studies the relationship between the size of the fiscal multiplier and the degree of capital mobility in some Latin American countries. Mundell’s (1963) and Fleming’s (1962) models show that this effect could be very large or small (close to zero) depending on the exchange rate and the degree of capital mobility, and the potency of a fiscal policy is inversely correlated with the degree of capital mobility. Based on Mora’s (2013) model, we argue that the multiplier might not be negatively correlated with capital mobility in these countries. In other words, the potency of fiscal policy could be small because the degree of capital mobility in Latin American countries is quite low. The empirical findings support our hypothesis. We have found that the size of the fiscal multiplier tends to increase or (at least) to remain around 1.40 in these countries in the short run; however, in the long run, this effect tends to decrease significantly to 0.34. These results also suggest that the effectiveness of fiscal policies in Latin American countries are still large but could be larger if they become more financially integrated with the rest of the world.

Keywords: Fiscal policy; Business cycles; Latin America (search for similar items in EconPapers)
JEL-codes: E12 E62 F41 O54 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0767

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