Abstract

JORGE TORO, Ignacio Lozano. Fiscal Policy Throughout the Business Cycle: The Colombian Experience . Ens. polit. econ. [online]. 2007, vol.25, n.55, pp.12-39. ISSN 0120-4483.

This paper reviews the close relationship between business cycle and public finances in Colombia. The international evidence shows that cyclical move-ments in output systematically affect the balance of public finances. Therefore, the assessment of cyclical and structural components of the budget balance becomes an important tool in the analysis of fiscal policy, because it may allow fiscal authorities to determine the extent to which the fiscal stance in a particular year refl ects their discretionary actions. Our findings indicate that the cyclical component of the central government balance in Colombia has been fairly small in recent times (for about 10% of the overall defi cit). Governments are not usually neutral during the business cycle. Ideally, they ought to practice a countercyclical fiscal policy to moder-ate the magnitude of output fl uctuations. However, in emerging economies, countercyclical fiscal poli-cies are inhibited by domestic and external factors. Using a standard reduced form model closely connected to the government budget constraint, we fi nd that fiscal policy in Colombia has been procyclical over the last 45 years or so, with the primary sur-plus falling (and the defi cit rising) as a share of GDP by approximately 1/5th of a percentage point when the output gap increases by one percentage point.

Keywords : Fiscal Policy; Business Cycle; Stabili-zation; Defi cit; Budget.

        · abstract in Spanish     · text in English     · English ( pdf )