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of debt since the global financial crisis may constrain countercyclical policy action during downturns. However, the situation differs greatly across countries, as some (for example, Chile, Paraguay, and Peru) have very low debt stocks.
Fiscal expansions in downturns are meant to address a demand shortfall and thus should be reversible or limited in time. If the higher expenditures are struc- tural in nature, it will be harder to readjust the stance when the economy improves. Chile has tried to reduce this risk by linking increases in structural spending to permanent revenues (for example, a recent tax reform to finance education spending). Most other countries in Latin America, however, do not make this distinction.
Fiscal Institutions
Many countries in Latin America have adopted reforms to strengthen fiscal insti- tutions, including fiscal rules. Provided that such rules are well designed, they can support sustainable fiscal policy while avoiding procyclicality. Indeed, countries such as Chile, Colombia, and Mexico have managed to move toward more coun- tercyclical policy while following a fiscal rule. Fiscal transparency is also impor- tant, for both policymakers and the public. Some recent examples of nontranspar- ent policies include the use of one-off transactions to reduce reported deficits or the increased use of deficit-neutral operations such as policy lending, which may still increase fiscal liabilities.
CONCLUSIONS
This chapter has considered the cyclicality of fiscal policy in Latin America using a new methodology that gives full credit to automatic stabilizers, while controlling for commodity prices and allowing for endogeneity. The evidence suggests that fiscal policy in Latin America has been procyclical, on average, rather than acyclical or countercyclical as in most advanced economies. Country-specific estimations, however, yield mostly insignificant results, as is common—but often unacknowl- edged—in comparable studies. In more recent years, Brazil, Chile, Colombia, El Salvador, and Mexico appear to have moved toward less procyclical or more coun- tercyclical fiscal policy. It remains to be seen whether this development will prevail during times of closed or positive output gaps, when previous fiscal stimulus measures should be unwound. More generally, countries need to rebuild their buf- fers, not least to be prepared for any future negative economic shock.
Apart from cyclical considerations, fiscal policy should be sustainable and transparent. Fiscal institutional measures such as well-designed fiscal rules can support sustainability without leading to procyclical fiscal policy. Fiscal transpar- ency has improved in many countries over the past decade, but recent examples indicate the reappearance of problematic behavior such as the use of one-off transactions and operations that are chosen to avoid increasing reported deficits.
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