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Download Fiscal Policy, Stabilization, and Growth: Prudence or by Guillermo E. Perry, Luis Servén, Rodrigo Suescún PDF

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By Guillermo E. Perry, Luis Servén, Rodrigo Suescún

Monetary coverage in Latin the USA has been guided essentially through temporary liquidity ambitions whose observance was once taken because the major exponent of economic prudence, with realization concentrated virtually completely at the degrees of public debt and the money deficit. little or no consciousness used to be paid to the results of financial coverage on development and on macroeconomic volatility over the cycle. vital matters corresponding to the composition of public charges (and its results on growth), the facility of financial coverage to stabilize cyclical fluctuations, and the forex composition of public debt have been principally overlooked. for this reason, economic coverage has usually amplified cyclical volatility and dampened development. economic coverage, Stabilization, and progress explores the behavior of financial coverage in Latin the US and its results for macroeconomic balance and long term progress. particularly, the publication highlights the procyclical and anti-investment biases embedded within the region's economic guidelines, explores their factors and macroeconomic outcomes, and asesses their attainable recommendations.

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Sample text

As before, the regression coefficient on the output gap measures the magnitude 12 of the automatic movements in government revenue in response to changes in cyclical conditions. 6 depicts the country-specific estimates of the output gap coefficient just described. Without exception, all industrial countries exhibit a statistically significant revenue response to cyclical fluctuations. In Latin America, few countries do. When the response is significant, it is much weaker than in the industrial country sample.

Rules that adjust revenues and expenditures for cyclical and structural factors can help to keep surpluses in good times out of reach from the political process in normal discretionary budgetary decisions. Naturally, political incentives to spend potential surpluses in good times could lead to violations or changes in the rule, unless exit costs are sufficiently high. Executive authorities will have stronger incentives to comply with rules if there are enforceable penalties (as with the Brazilian Fiscal Crimes Law) and if their design does not leave much room for cheating.

Analogously to consumers’ behavior under Milton Friedman’s permanent-income hypothesis, the rule allows governments to borrow when revenue is temporarily low or when present investment opportunities are greater than future investment opportunities. But the permanent-balance rule entails rather stringent informational requirements. In particular, to set taxes today as stated by the rule, the policy maker needs access to long-term fiscal projections specifying the trajectory of the primary surplus far into the future.

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