Edited by Patrick Artus, André Cartapanis and Florence Legros
Chapter 13: Fiscal Policy and War of Attrition: The Case of Latin American Countries
Jean-Pierre Allégret and Marie-Noëlle Cales INTRODUCTION If monetary policy credibility has been the object of a large debate in the literature, it is not the case for ﬁscal policy credibility. Yet the analysis of the conduct of ﬁscal policy has been renewed in two directions. On the one hand, the Stability and Growth Pact in the European Union has showed the importance of the policy mix in a monetary union. On the other hand, studies on stabilization plans in Latin America – for instance Ter-Minassian and Schwartz (1997); Calvo and Végh (1998) – have stressed that the control of ﬁscal balances is an essential condition in the success of these plans. Monetary policy is not the only factor of inﬂation control. Indeed as demonstrated in numerous empirical studies, there is a long-term relationship between ﬁscal unbalances and inﬂation. To stabilize the expectation of inﬂation by the private agents, the authorities have to stabilize ﬁscal balances. In this chapter we study ﬁscal policy credibility by focusing on the stabilization of the ﬁscal balance. Since the early 1990s, Latin American countries have displayed strong ﬁscal consolidation. But as noticed by Ter-Minassian and Schwartz (1997, p. 10), the common characteristic of these countries ‘is perhaps the fact that they all failed to signal convincingly a fundamental change of the economic policy regime and therefore lacked credibility’. The main implication of the ﬁscal adjustment is to induce pro-cyclical ﬁscal policies which destabilize output. From our point of view such behaviour...
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