Fiscal Policy, Stabilization, and Growth: Prudence or Abstinence?

Fiscal policy in Latin America has been guided primarily by short-term liquidity targets whose observance was taken as the main exponent of fiscal prudence, with attention focused almost exclusively on the levels of public debt and the cash deficit. Very little attention was paid to the effects of fiscal policy on growth and on macroeconomic volatility over the cycle. Important issues such as the composition of public expenditures (and its effects on growth), the ability of fiscal policy to stabilize cyclical fluctuations, and the currency composition of public debt were largely neglected. As a result, fiscal policy has often amplified cyclical volatility and dampened growth. 'Fiscal Policy, Stabilization, and Growth' explores the conduct of fiscal policy in Latin America and its consequences for macroeconomic stability and long-term growth. In particular, this book highlights the pro-cyclical and anti-investment biases embedded in the region's fiscal policies, explores their causes and macroeconomic consequences, and assesses their possible solutions. This publication belongs to the Latin American Development Forum Series (LADF), sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank.