Fiscal Policy Effects and Capital Mobility in Some Latin American Countries

This paper studies the relationship between the size of the fiscal multiplier and the degree of capital mobility in some Latin American countries. The Mundell (1963) and Fleming (1962) model establishes that this effect might be very large or very small (very close to zero) depending on the exchange rate regime and the degree of capital mobility; the potency of fiscal policy is inversely correlated with the degree of capital mobility. We use Mora (2013) model to argue that the multiplier might not be negatively correlated with capital mobility in these countries. In other words, the potency of fiscal policy could be reduced by the fact that capital mobility in Latin American countries tends to be quite low. The empirical findings support the hypothesis. We have found that the size of the fiscal multiplier tends to increase or (at least) to remain relatively stable, around 1.40, in these countries in the short run; however, in the long run, this effect tends to decrease significantly to 0.34. These results also suggest that fiscal policy is still very potent, but given their economic structure differences, could be larger if Latin American countries become more financially integrated with the rest of the world