Fiscal policy, cycles and growth

Includes bibliography

In Latin America, macroeconomic fluctuations have been more frequent and more serious in recent decades than in other parts of the world, and this volatility has adversely affected the development processes of the countries of the region. This article looks at the desirability of establishing economic policy rules, particularly in the fiscal area, to reduce the frequency and size of these imbalances. The interactions between fiscal policy, the economic cycle and growth are reviewed, and the difficulty of establishing a convincing numerical relation between public expenditure and long-term growth is demonstrated. The theories proposing the reduction of public expenditure as a means of improving macroeconomic performance do not have any solid empirical bases. "Fine tuning", which should in principle make it possible to reduce the effects of disturbances and hence reduce the impact of this negative relation between volatility and growth require the existence of flexible instruments for explicitly dealing with the adverse disturbances that frequently arise. It is therefore necessary to adopt policies which will make it possible to overcome the dilemma between credibility and flexibility. The suggested manner of tackling volatility is connected with political and institutional factors that lie at the basis of the expectations of the private agents and can encourage them to save and invest in a long-term economic horizon rather than with the imposition of rigid rules that impede intervention by the authorities in the economic cycle. In the fiscal area, the article analyses the dilemma between sustainability and regulatory capacity and posits the need to make more intensive use of fiscal instruments for stabilization in order to ensure a better macroeconomic performance.