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Vol. 35 No. 62 (2016)

Economic policy

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

https://doi.org/10.19053/22565779.5230

Published 2016-07-26

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

Luis Ignacio Lozano Espitia
Banco de la República

Ligia Alba Melo-Becerra
Banco de la República

Jorge Enrique Ramos
Banco de la República

Abstract

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. 

Keywords

capital flows, fiscal policy, emerging economies

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