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Reassessing Fiscal Policy: Perspectives from Developing Countries

Authors

  • Leonardo Vera

    1. is Associate Professor of Macroeconomics and Advanced Economic Theory at the School of Economics at Universidad Central de Venezuela (UCV), Caracas 1080, Venezuela. He was named ‘Andrés Bello Fellow’ at the University of Oxford (2002–03) and has been Visiting Fellow at Flacso-Ecuador. His theoretical and empirical work focuses on development macroeconomics, financial markets and public policy with an emphasis on issues related to Latin America. His publications include Stabilization and Growth in Latin America: A Critique and Reconstruction from Post Keynesian and Structuralist Perspectives (Palgrave, 2001), as well as articles in numerous academic journals such as Cambridge Journal of Economics, Journal of Post Keynesian Economics and Metroeconomica.
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  • An earlier version of this article was presented at the 9th International Post Keynesian Conference held at the University of Missouri in September 2006. The author is grateful for comments received from participants. Geoffrey Harcourt and three anonymous referees provided additional and extremely helpful comments. The usual caveat applies.

ABSTRACT

Over the last twenty-five years an anti-Keynesian orthodox approach has envisaged a prominent role for reductions in fiscal deficits in developing countries. Expansionary fiscal policies have been said to result in excessive expansion of aggregate demand leading to current account deficits and inflation, as well as displacing private investment, thereby inhibiting output stabilization and employment recovery. Moreover, chronic fiscal deficits are supposed to be associated with high and explosive debt/GDP ratios. The purpose of this article is to assess the theoretical adequacy of the orthodox approach in the context of developing countries. The author clarifies some common misunderstandings and finds that none of the conventional arguments against fiscal activism is wholly convincing. At the heart of the debate lies the question of assumptions, economic structure and causation mechanisms. The orthodox stories regarding the macroeconomic effects of fiscal policy very often do not go beyond the simple monetarist assumptions or seek to verify the implications against the existing experiences and empirical data from developing countries.

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