The Size and Effectiveness of Automatic Fiscal Stabilizers in Latin America

This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb con...

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Bibliographic Details
Main Author:	Suescún, Rodrigo
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ADJUSTMENT COST ADJUSTMENT COSTS AGGREGATE OUTPUT ARBITRAGE BENCHMARK BONDS BORROWING BUDGET BALANCE BUDGET CONSTRAINT BUDGETARY POLICIES BUDGETARY POSITION BUSINESS CYCLE BUSINESS CYCLES BUSINESS INCOME BUSINESS INCOME TAXES CAPITA TERMS CAPITAL FLOWS CAPITAL GAINS CAPITAL INVESTMENT CAPITAL MARKET CAPITAL MARKETS CENTRAL GOVERNMENT CLOSED ECONOMY COMPARATIVE ADVANTAGE CONSTANT RETURNS CONSTANT RETURNS TO SCALE CONSUMERS CONSUMPTION EXPENDITURES CORPORATE INCOME CORPORATE TAXES COUNTRY REGRESSIONS COUNTRY REPORTS COUNTRY-BY-COUNTRY BASIS CROSS-COUNTRY STUDIES DEBT DEVELOPED COUNTRIES DEVELOPED WORLD DEVELOPING COUNTRIES DISCOUNT RATE DISCOUNTED VALUE DISCRETIONARY FISCAL POLICY DISCRETIONARY POLICY DISPOSABLE INCOME ECONOMIC ACTIVITY ECONOMIC FLUCTUATIONS ECONOMIC GROWTH ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL WORK EQUILIBRIUM EQUILIBRIUM DYNAMICS EXPECTED UTILITY EXPLANATORY VARIABLES EXPORTS EXTERNAL DEBT EXTERNAL SHOCKS FINANCIAL SECTOR FISCAL EXPENDITURE FISCAL MANAGEMENT FISCAL POLICIES FISCAL POLICY FISCAL REACTION FISCAL REACTION FUNCTION GDP GOVERNMENT BONDS GOVERNMENT BORROWING GOVERNMENT BUDGET GOVERNMENT DEBT GOVERNMENT EXPENDITURES GOVERNMENT FINANCE GOVERNMENT FINANCE STATISTICS GOVERNMENT REVENUE GOVERNMENT SPENDING GOVERNMENT SPENDING SHOCKS GROWTH RATE IMPERFECT SUBSTITUTES INCOME ELASTICITY INCOME SHARE INCOME TAX INCOME TAXATION INCOME TAXES INCOMES INDUSTRIAL ECONOMIES INFLATION RATE INTEREST RATES INTERNATIONAL TRADE LATIN AMERICAN LONG-TERM GROWTH MACROECONOMIC POLICIES MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMICS MARGINAL PRODUCTIVITY MEMBER COUNTRIES MONETARY POLICIES MONETARY POLICY MONETARY UNION NATIONAL INCOME NEGATIVE CORRELATION NET EXPORTS OPEN ECONOMY OPTIMIZATION OUTPUT GAP OUTPUT VOLATILITY PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAX SYSTEM PERSONAL INCOME TAXES POLICY CHANGES POLICY MEASURES POLICY RESEARCH POPULATION GROWTH POSITIVE CORRELATION POSITIVE RELATIONSHIP PRICE STABILITY PRIMARY BUDGET PRIMARY BUDGET BALANCE PRIMARY BUDGET SURPLUS PUBLIC CONSUMPTION PUBLIC DEBT PUBLIC FINANCE PUBLIC POLICY RANDOM WALK REAL INTEREST RATE REAL TERMS RELATIVE PRICE RELATIVE PRICES RESOURCE ALLOCATION REVENUE COLLECTION SECTORAL ALLOCATION SERIES DATA SOCIAL SECURITY SOCIAL SECURITY CONTRIBUTIONS STABILIZATION ROLE STATE GOVERNMENT TAX TAX BASE TAX BASES TAX LAW TAX PAYMENTS TAX RATE TAX RATES TAX REVENUE TAX STRUCTURE TAX SYSTEM TAXATION TOTAL FACTOR PRODUCTIVITY TOTAL OUTPUT UNEMPLOYMENT UNEMPLOYMENT COMPENSATION UNEMPLOYMENT INSURANCE UTILITY FUNCTIONS VALUE ADDED WAGES WEALTH ZERO ELASTICITY
Online Access:	http://documents.worldbank.org/curated/en/2007/06/7681011/size-effectiveness-automatic-fiscal-stabilizers-latin-america http://hdl.handle.net/10986/7072

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Summary:	This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks; (2) world business cycle shocks; (3) terms of trade shocks; (4) government spending shocks; and (5) nontradable and (6) tradable sector technology innovations. Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region's observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The model captures many of the salient features of Latin America's business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. And government size-measured by the GDP ratio of government spending-plays the role of an automatic stabilizer, but its smoothing effect is very weak.

The Size and Effectiveness of Automatic Fiscal Stabilizers in Latin America

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