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Fiscal Crises
A key objective of fiscal policy is to maintain the sustainability of public finances and avoid crises. Remarkably, there is very limited analysis on fiscal crises. This paper presents a new database of fiscal crises covering different country groups, including low-income developing countries (LIDCs) that have been mostly ignored in the past. Countries faced on average two crises since 1970, with the highest frequency in LIDCs and lowest in advanced economies. The data sheds some light on policies and economic dynamics around crises. LIDCs, which are usually seen as more vulnerable to shocks, appear to suffer the least in crisis periods. Surprisingly, advanced economies face greater turbulence (growth declines sharply in the first two years of the crisis), with half of them experiencing economic contractions. Fiscal policy is usually procyclical as countries curtail expenditure growth when economic activity weakens. We also find that the decline in economic growth is magnified if accompanied by a financial crisis.
The Effects of Inflation on Public Finances
Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.
Effective Fiscal-Monetary Interactions in Severe Recessions
The COVID-19 pandemic and the subsequent need for policy support have called the traditional separation between fiscal and monetary policies into question. Based on simulations of an open economy DSGE model calibrated to emerging and advance economies and case study evidence, the analysis shows when constraints are binding a more integrated approach of looking at policies can lead to a better policy mix and ultimately better macroeconomic outcomes under certain circumstances. Nonetheless, such an approach entails risks, necessitating a clear assessment of each country’s circumstances as well as safeguards to protect the credibility of the existing institutional framework.
Uncertainty and Public Investment Multipliers: The Role of Economic Confidence
This paper investigates how macroeconomic uncertainty affects the fiscal multiplier of public investment. In theory, uncertainty can reduce the multiplier if the private sector becomes more cautious and does not respond to the fiscal stimulus. Conversely, it can increase the fiscal multiplier if public investment shocks improve private agents’ expectations about future economic outlook, and lead to larger private spending. Using the disagreement about GDP forecasts as a proxy for uncertainty, we find that unexpected increases in public investment have larger and longer-lasting effects on output, investment, and employment during periods of high uncertainty, with multipliers above 2, and the larger multipliers are not driven by economic slack. Public investment shocks are also found to boost private sector confidence during heightened uncertainty, driving-up expectations about future economic development which in turn magnify private sector response to the initial stimulus.
Fiscal Rules and Fiscal Councils: Recent Trends and Performance During the COVID-19 Pandemic
Adoption of fiscal rules and fiscal councils continued to increase globally over the last decades based on two new global datasets. During the pandemic, fiscal frameworks were put to test. The widespread use of escape clauses was one of the novelties in this crisis, which helped provide policy room to respond to the health crisis. But the unprecedented fiscal actions have led to large and widespread deviations from deficit and debt limits. The evidence shows that fiscal rules, in general, have been flexible during crises but have not prevented a large and persistent buildup of debt over time. Experience shows that deviations from debt limits are very difficult to reverse. The paper also presents evidence on the benefits of a good track record in abiding by the rules. All these highlight the difficult policy choices ahead and need to further improve rules-based fiscal frameworks.
The Future of Oil and Fiscal Sustainability in the GCC Region
The oil market is undergoing fundamental change. New technologies are increasing the supply of oil from old and new sources, while rising concerns over the environment are seeing the world gradually moving away from oil. This spells a significant challenge for oil-exporting countries, including those of the Gulf Cooperation Council (GCC) who account for a fifth of the world’s oil production. The GCC countries have recognized the need to reduce their reliance on oil and are all implementing reforms to diversify their economies as well as fiscal and external revenues. Nevertheless, as global oil demand is expected to peak in the next two decades, the associated fiscal imperative could be both larger and more urgent than implied by the GCC countries’ existing plans.
Smart Containment: Lessons from Countries with Past Experience
Following the Great Lockdown in 2020, it is important to take stock of lessons learned. How effective have different containment measures been in slowing the spread of Covid-19? Have containment measures been costly in terms of economic growth, fiscal balances, and accumulated debt? This paper finds that countries with previous SARS experience acted fast and "smart", and were able to contain the virus by relying mainly on public health measures ─ testing, contact tracing, and public information campaigns ─ rather than stay-at-home requirements. Using past coronavirus outbreaks as an instrumental variable, we show that countries with past experience were able to contain the virus in a smart way, reducing transmission and deaths while also experiencing higher economic growth in 2020.
Morocco's Quest for Stronger and Inclusive Growth
Throughout the past two decades, Morocco has faced several external and domestic shocks, including large swings in international oil prices, regional geopolitical tensions, severe droughts, and most recently the impact of the pandemic and the economic fallout from Russia's invasion of Ukraine. Despite rough waters, the government stayed the course and remained focused not only on immediate stability, but also on the long-term needs of the Moroccan economy. This involved the adoption of a series of difficult measures, like the elimination of energy subsidies, and a strategy aimed at improving the country's infrastructure, diversifying the production and export bases by attracting foreign inve...
Reassessing the Role of State-Owned Enterprises in Central, Eastern and Southeastern Europe
The Central, Eastern, and South Eastern European (CESEE) region is ripe for a reassessment of the role of the state in economic activity. The rapid income convergence with Western Europe of the early 2000s was not always equally shared across society, and it has now slowed dramatically in many countries of the region.
Regional Economic Outlook, May 2013, Western Hemisphere
Despite some global risks, external conditions for Latin America should remain stimulative. With monetary policy in advanced economies expected to stay accommodative, external financing conditions will remain favorable. Strong demand from emerging Asian economies and the gradual recovery of advanced economies will continue to support commodity prices, benefiting exporters. The main policy challenge for most of the region is to take advantage of current conditions to continue buttressing a foundation for sustained growth. Other issues important to the region include: (i) strengthening balance sheets; (ii) understanding how changes in external conditions could impact public and external debt dynamics; and (iii) making the best use of the windfall from the recent terms-of-trade boom.
