Working Paper

Is tighter fiscal policy expansionary under fiscal dominance? Hypercrowding out in Latin America

Abstract: We test for hypercrowding out as a signal of market concerns over fiscal dominance in five Latin American countries. Hypercrowding out occurs when fiscally dominated governments domestic credit demands are perceived as so intrusive to a nations financial system that a move towards fiscal surplus lowers interest rates and increases growth. We sample five Latin American countries to test for these relationships. Judged by the results of vector error correction models, three nations test clearly positive, suggesting market concern despite their recent efforts towards fiscal balance.

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Center for Latin America Working Papers

Publication Date: 2005

Number: 0205