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Empirical Economics
Erschienen in: Empirical Economics 4/2017

27.09.2016

Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia

verfasst von: Juan Camilo Galvis Ciro, Helder Ferreira de Mendonça

Erschienen in: Empirical Economics | Ausgabe 4/2017

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Abstract

This paper relates to the literature on the possible effect of inflation targeting on fiscal discipline in developing countries. In particular, we present empirical evidence to address this issue based on the Colombian experience. This study relies on two main issues. The first is to verify whether the adoption of inflation targeting in Colombia affected the discretionary fiscal component in the period 2004–2014. The second issue is to analyze whether the monetary credibility amplified the effect of the monetary policy on changes in the discretionary fiscal component. The results denote that inflation targeting causes an impact on fiscal policy in Colombia. In particular, the greater monetary credibility the less change in discretionary fiscal component is observed.
Vorheriger Artikel Endogeneity and nonlinearities in Central Bank of Brazil’s reaction functions: an inverse quantile regression approach
Nächster Artikel The importance of the financial system for the real economy

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Fußnoten
1
About this subject, see Lucotte (2012).
 
2
See Table 5 (Appendix) for sources of data and description of all variables used in the study.
 
3
Before adoption of inflation targeting, monetary policy in Colombia cannot be classified as active in the Leeper’s sense (1991) because, in general, it was used to support the exchange rate bands system (see Vargas 2005).
 
4
For several examples of the use of this credibility index in the literature, see Doğan and Bozdemir (2014), Fernandes (2013), Salle et al. (2013), Montes (2013), Khemiri and Ali (2012), and Dieters (2010).
 
5
Survey of inflation expectations of the Central Bank of Colombia considers an average of 40 participants from banks, financial market brokerage firms, pension funds, and international organizations.
 
6
See, for example, Fatás and Mihov (2003b), Afonso et al. (2010), Agnello et al. (2013), and Blanchard and Perotti (2002).
 
7
Because inflation rate in Colombia was lower than one digit during the period under analysis (2004–2014), it was not included as a control variable in the model.
 
8
We use a lag of 12 months because it is long enough to measure important changes in the fiscal position. Furthermore, the lag helps to decrease the possible simultaneity for analysis of the fiscal and monetary policy interactions that can cause econometric problems.
 
9
List of GMM instruments is available on Table 7—Appendix.
 
10
Taking into account the three tests, at least two indicate that the series under analysis are I(0).
 
11
The correlation between credibility and reputation is 0.22.
 
12
Similar results are found in Fatás and Mihov (2003b), Afonso et al. (2010), and Agnello and Souza (2014).
 
13
The integration order of the series is the same as that observed for the full period (see Table  9—Appendix).
 
14
The VAR order is 1 based on Akaike, Schwarz, and Hannan–Quinn criteria. Furthermore, VAR satisfies the stability condition. Tests are available from the authors on request.
 
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Metadaten
Titel
Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia
verfasst von
Juan Camilo Galvis Ciro
Helder Ferreira de Mendonça
Publikationsdatum
27.09.2016
Verlag
Springer Berlin Heidelberg
Erschienen in
Empirical Economics / Ausgabe 4/2017
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-016-1177-2

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