Fiscal policy and capital flows: evidence for some countries in Latin America

La política fiscal frente a los flujos de capital: evidencia para algunos países de América Latina

Main Article Content

Luis Ignacio Lozano Espitia
Ligia Alba Melo-Becerra
Jorge Enrique Ramos


Capital flows represent opportunities to finance the growth and development of countries, but they also entail risks, including macroeconomic and financial. Policy responses to mitigate its effects play an important role especially in emerging markets. This paper evaluates the fiscal policy stance in front to shocks on capital flows recorded during the last two decades in six emerging economies of Latin America: Argentina, Brazil, Chile, Colombia, Mexico and Peru.Based on the characterization of the different episodes of sudden inflows and outflows of capital and on the results of a panel data model with instrumental variables, we found that governments did not responded with exceptional fiscal measures. By contrast, the procyclicality in the fiscal stance seems to be associated to the effect of capital flows on economic activity. 



Download data is not yet available.

Article Details

References (SEE)

Adler, G. & Sosa, S. (2011). Commodity price cycles: the perils of mismanaging the boom. IMF Working Paper, (11), 283.

Agosin, M. & French-Davis, R. (1996). Managing capital inflows in Latin America. In M. Haq, I. Kaul & I. Grunberg (Eds.). The Tobin tax, coping with financial volatility. New York and Oxford: Oxford University Press.

Bustelo, P. (2004). Capital flows and financial crises: a comparative analysis of East Asia 1997-1998 and Argentina 2001-2002. Universidad Complutense de Madrid Working Paper, (17).

Calvo, G., Leiderman, L. & Reinhart, C. (1993). Formulating a policy response: reply to Snowden. IMF Staff Papers, 40(4), 868-870.

Calvo, G., Leiderman, L. & Reinhart, C. (1996). Inflows of capital to developing countries in the 90´s. Journal of Economic Perspectives, 10(2), 123-139.

Cárdenas, M. & Barrera, F. (1994). Efectos macroeconómicos de los capitales extranjeros: el caso colombiano. En R. Steiner (eds.), Afluencia de capitales y estabilización en América Latina. Bogotá: Tercer Mundo Editores y Fedesarrollo.

Cepal (Comisión Económica Para América Latina) (1998). Impacto de la crisis asiática en América Latina y el Caribe. Santiago de Chile: Comisión Económica para América Latina, Naciones Unidas.

Céspedes, L. & Velasco, A. (2011). Was this time different? Fiscal policy in commodity Republics. BIS Working Papers, (365).

Cook, D. & Devereux, M. (2006). Capital inflows, fiscal discretion, and exchange rate policy. European Economic Review, 50(8), 1975-1992.

Craig, B. (2005). Fiscal sustainability in theory and practice. A handbook. Washington DC: The World Bank.

Fatas, A. & Mihov, I. (2009). The Euro and Fiscal Policy. NBER Working Paper Series, (14722). Retrieved from

Favero, C. & Giavazzi, F. (2004). Inflation targeting and debt: lessons from Brazil. NBER Working Paer Series, (0390). Retrieved from

Ffrench-Davis, R. (1997). El efecto Tequila, sus orígenes y su alcance contagioso. Desarrollo Económico, 37(146), 195-214.

Fischer, S. (1998). The Asian crisis: a view from the IMF. Journal of International Financial Management & Accounting, 9(2), 167–176.

FMI (Fondo Monetario Internacional) (2004). Lessons from the crisis in Argentina. IMF Working Paper.

FMI (Fondo Monetario Internacional) (2011). Recent experiences in managing capital inflows: cross-cutting themes and possible policy framework. IMF Working Paper.

Frankel, J., Vegh, C. & Vuletin, G. (2013, January). On graduation from procyclicality. Journal of Development Economics, 100, 32-47.

Gavin, M., Hausmann, R. & Leiderman, L. (1997). The macroeconomics of capital flows to Latin America: experience and policy issues. Inter-American Development Bank, Working Paper, (310).

Gavin, M., Hausmann, R., Perotti, R. & Talvi, E. (1996). Managing fiscal policy in Latin America and the Caribbean: volatility, procyclicality, and limited creditworthiness.Inter-American Development Bank, Working Paper, (326).

Hodrick, R. & Prescott, E. (1980). Postwar U.S. business cycles: an empirical investigation.Discussion Papers n.° 451. Pittsburgh, MSS: Carnegie-Mellon University, Northwestern University. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.

Ilzetzki, E. & Végh, C. (2008). Procyclical fiscal policy in developing countries: truth or fiction? NBER Working Paper Series, (4191). Retrieved from

Ilzetzki, E., Reinhart, C. & Rogoff, K. (2008). Exchange rate arrangements entering the 21st Century: which anchor will hold? University of Maryland and Harvard University, Working Paper.

Ilzetzki, E., Mendoza, E. & Végh C. (2010). How big (samll?) are fiscal multipliers? NBER Working Paper Series, (16479). Retrieved from

Izquierdo, A., Romero, R. & Talvi, E. (2008). Booms and Busts in Latin America: the role of external factors. Inter-American Development Bank Working Paper, (631).

Julio, J.M., Lozano, I. & Melo, L. (2012). Quiebre estructural de la relación entre la política fiscal y el riesgo soberano en las economías emergentes: el caso colombiano. Borradores de Economía, Banco de la República, (693).

Kaminsky, G., Reinhart, C. & Végh, C. (2004). When it rains, it pours: procyclical capital flows and macroeconomic policies. NBER Working Paper Series, (10780).

Kinkyo, T. (2004). Transmission channels of capital flow shocks: why Korean crisis was so severe. Working Papers. London, UK: Department of Economics, School of Oriental and African Studies, University of London. Marfán, M. (2001, agosto). Rol macroeconómico de la política fiscal. Chile: Cepal.

Mendoza, E. & Terrones, M. (2008). An anatomy of credit booms: evidence from macro aggregates and firm level data. NBER Working Paper Series, (14049).

Ocampo, J. A. (2010). How well has Latin America fared during the global financial crisis? Paper of the James A. Baker III Institute for Public Policy of Rice University. Retrieved from OcampoLatinAmCrisis-112910.pdf

Tornell, A. & Velasco, A. (2000). Fixed versus flexible exchange rate: which provide more fiscal disciple? Journal of Monetary Economics, 45(2), 399-436.

Toro, J., Mora, R. & Parra, D. (2012). Flujos de capital, la crisis financiera internacional y los desbalances macroeconómicos. Borradores de Economía, Banco de la República, (720).

Vegh, C. & Vuletin, G. (2012, January). How is tax policyconducted over the business cycle? NBER Working Paper, (17753).