To read this content please select one of the options below:

The government spending multiplier in Latin American countries: does the institutional environment matter?

Rafael Acevedo (Texas Tech University, Lubbock, Texas, United States Of America)
Jose U. Mora (Pontificia Universidad Javeriana, Bogota, Bogotá, Colombia)
Andrew T. Young (Texas Tech University, Lubbock, Texas, United States Of America)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 17 August 2021

Issue publication date: 24 June 2022

102

Abstract

Purpose

Mora and Acevedo (2019) report that the government spending multipliers in Latin American countries are notably higher than what is typically reported for developed economies. Latin American countries have been inclined toward using procyclical fiscal policies. Those policies have been perceived as being effective at mitigating the effects of the 2008–2009 Great Recession. This study aims to estimate the government spending multiplier using Latin American panel data from 19 Latin American countries from 2000 to 2018. The estimates are conditional on the extent of openness, capital mobility and economic freedom. Based on the results, the latter is important: the less economically free a country, the larger its spending multiplier. Lower economic freedom in Latin American countries can help to account for their large spending multipliers. In particular, restrictions on international trade are positively associated with multipliers. This is the case even while controlling the trade share of GDP.

Design/methodology/approach

The authors provide regression results that are conditional on the extent of openness, capital mobility and economic freedom.

Findings

The less economically free a country, the larger its spending multiplier. Lower economic freedom in Latin American countries can help to account for their large spending multipliers. In particular, restrictions on international trade are positively associated with multipliers. This is the case even while controlling the trade share of GDP.

Originality/value

To the best of the authors’ knowledge, this is first study to estimate the fiscal multiplier conditional on economic freedom levels. The authors provide correctly calculated multipliers conditional on different levels of economic freedom. The authors point the way to future studies considering the effectiveness of fiscal policy conditional on institutional/policy quality.

Keywords

Acknowledgements

The authors thank two anonymous referees for helpful comments. A working paper version of this paper previously circulated as Acevedo et al. (2021).

Citation

Acevedo, R., Mora, J.U. and Young, A.T. (2022), "The government spending multiplier in Latin American countries: does the institutional environment matter?", Journal of Financial Economic Policy, Vol. 14 No. 4, pp. 476-490. https://doi.org/10.1108/JFEP-02-2021-0030

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

Related articles