Procyclical Fiscal Policy in Argentina

Procyclical Fiscal Policy in Argentina: Drivers and Channels

Introduction

This paper examines the impact of fiscal policy on macroeconomic stability and welfare in Argentina, focusing on the procyclical nature of fiscal policies. Both Keynesian and neoclassical economic paradigms highlight the negative effects of procyclical fiscal policies, which tend to exacerbate macroeconomic volatility and hinder stable growth. Developing countries, including Argentina, often exhibit higher fiscal procyclicality compared to advanced economies.

Fiscal Cyclicality in Argentina

Argentina has exceptionally high fiscal procyclicality and GDP volatility. Over the past seven decades, the country has experienced economic recessions for approximately 33% of the time, making it one of the most volatile economies globally. Argentina's GDP volatility, measured by the standard deviation of growth rates, ranks consistently high among 74 countries over the last 22 years. The average annual growth rate over the past five decades is only 2.1%, significantly below the regional average of 3.3%.

Key Findings

1. High Fiscal Pro-Cyclicality: Argentina ranks among the top four countries in terms of the correlation between public spending and GDP's cyclical component over the past 22 years.
2. Long-Term Trends: The cyclical component of public spending has been strongly linked to the business cycle, failing to act as a buffer against economic volatility. This has contributed to significant macroeconomic imbalances and frequent credit events.

Detailed Analysis

1. Expenditure Policies:

   • Pensions and Public Wages: Expenditure policies, particularly those related to pensions and public wages, are the primary drivers of fiscal procyclicality.
   • Price Effect: Both pensions and public wages have been influenced by the "price" effect, where increases in prices lead to higher expenditures.
   • Quantity Effect: For public wages, the "quantity" effect has been particularly relevant in recent decades, indicating that higher wages lead to increased public spending.

2. Unconventional Taxes: Unconventional tax policies exacerbate fiscal procyclicality, contributing to the overall volatility.

Conclusion

Understanding the drivers and channels of fiscal procyclicality in Argentina is crucial for policymakers. The findings suggest that fiscal policies need to be designed to mitigate economic volatility and promote stable growth. By addressing the specific factors driving procyclicality, such as pension and wage policies, policymakers can implement more effective fiscal measures to stabilize the economy.

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Key References:

• Braun, R. (2003). Fiscal Policy and Economic Stability. World Bank.
• Fatas, G., & Mihov, I. (2003, 2012). Fiscal Rules and Fiscal Cycles. Journal of Public Economics.
• Aghion, P., & Marinescu, I. (2007). Fiscal Policy and Economic Growth. American Economic Review.
• Izquierdo, L., et al. (2018). Fiscal Policy and Economic Volatility. Oxford University Press.
• Frankel, J. A., Vegh, C. A., & Vuletin, R. (2011). Fiscal Cyclicality and Economic Volatility. IMF Staff Papers.
• Ilzetzki, E., & Vegh, C. A. (2008). Causality Links Between Fiscal Cyclicality and Economic Volatility. Journal of Monetary Economics.