Macroeconomic Gains from Structural Fiscal Policy Adjustments: The Case of Colombia

Policymakers worldwide are drawing key lessons from recent debates on the role of fiscal policy in the recovery of advanced economies. Interestingly, in the late 1990s, facing the collapse of their economies, many emerging market economies addressed some of the focal issues currently discussed, such as the timing of fiscal adjustments, the need of fiscal impulses and their scope, the effectiveness of fiscal instruments along the cycle and the thresholds above which public-debt would hamper economic growth. In this paper, we present some evidence from Colombia suggesting that fiscal consolidation may have important effects on the behavior of the macroeconomy. Using structural nonlinear impulse response functions, we find that a fiscal policy that reduces the structural fiscal deficit, decreases the Government currency mismatch and deepens the local fixed-rate public bond market results in stronger reactions of output to Government expenditure shocks and in greater responses of market interest rates to monetary policy shocks