Skip to main content
SpringerLink
Log in

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

  • Published:
Empirical Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Similar content being viewed by others

Notes

  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.

References

  • Afonso A, Agnello L, Furceri D (2010) Fiscal policy responsiveness, persistence and discretion. Public Choice 145(3):503–530

    Article  Google Scholar 

  • Agnello L, Souza R (2014) The determinants of the volatility of fiscal policy discretion. Fiscal Stud 35(1):91–115

    Article  Google Scholar 

  • Agnello A, Furceri D, Sousa R (2013) How best to measure discretionary fiscal policy? Assessing its impact on private spending. Econ Model 34(C):15–24

    Article  Google Scholar 

  • Aktas Z, Kaya N, ÖZlale Ü (2010) Coordination between monetary policy and fiscal policy for an inflation targeting emerging market. J Int Money Finance 29(1):123–138

  • Alesina A (1987) Macroeconomic policy in a two-party system as repeated game. Q J Econ 102:651–678

    Article  Google Scholar 

  • Alesina A, Perotti R (1995). Fiscal expansions and fiscal adjustments. OECD Countries. NBER, Working Papers Series, 5214, pp 1–38

  • Alesina A, Tabellini G, Campante FR (2008) Why is fiscal policy often procyclical? J Eur Econ Assoc 6(5):1006–1036

    Article  Google Scholar 

  • Allsopp C, Vines D (2005) The macroeconomic role of fiscal policy. Oxf Rev Econ Policy 21(4):485–508

    Article  Google Scholar 

  • Andersson K, Berg C (1995) The inflation target in Sweden. In: Haldane AG (ed) Targeting inflation. Bank of England, London, pp 207–225

    Google Scholar 

  • Blanchard O (1990) Suggestions for a new set of fiscal indicators. OECD Economics and Statistics Department, Working Paper, 79, pp 1–37

  • Blanchard O (2005) Fiscal dominance and inflation targeting: lessons from Brazil. NBER Working Papers, 10389, pp 1–46

  • Blanchard O, Perotti R (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q J Econ 107(4):1329–1368

    Article  Google Scholar 

  • CáRdenas M, Partow Z (1998) Does independence matter? Case studies from Colombia. Inter-American Development Bank, Working paper r-341

  • Cukierman A, Meltzer AH (1986) A theory of ambiguity, credibility, and inflation under discretion and asymmetric information. Econometrica 54(5):1099–1128

    Article  Google Scholar 

  • Davidson R, Mackinnon J (2004) Econometric theory and methods. Oxford University Press, New York

    Google Scholar 

  • de Mendonça HF (2007) Towards credibility from Inflation targeting: the Brazilian experience. Appl Econ 39(20):2599–2615

    Article  Google Scholar 

  • de Mendonça HF, Silva RT (2009) Fiscal effect from inflation targeting: the Brazilian experience. Appl Econ 41(7):885–897

    Article  Google Scholar 

  • de Mendonça HF, de Guimarães e Souza GJG (2009) Inflation targeting credibility and reputation: the consequences for the interest rate. Econ Model 26(6):1228–1238

  • de Mendonça HF, de Guimarães e Souza GJG (2012) Is inflation targeting a good remedy to control inflation? J Dev Econ 98(2):178–191

  • de Mendonça HF, Faria I (2013) Financial market reactions to announcements of monetary policy decisions: evidence from the Brazilian case. J Econ Stud 40(1):54–70

    Article  Google Scholar 

  • de Mendonça HF, Galveas KAS (2013) Transparency and Inflation: what is the effect on the Brazilian Economy? Econ Syst 37(1):69–80

    Article  Google Scholar 

  • de MendonçA HF, Veiga IS (2014) A note on openness and inflation targeting: implications for the unpleasant fiscal arithmetic. Macroecon Dyn 18(5):1187–1207

    Article  Google Scholar 

  • de Mendonça HF, Tostes FS (2015) The effect of monetary and fiscal credibility on exchange rate pass-through in an emerging economy. Open Econ Rev 26(4):787–816

    Article  Google Scholar 

  • Dieters MAF (2010) The impact of surprise policy actions on interest rates: the influence of central bank credibility. Thesis, MSc Economics & Business. Erasmus University Rotterdam

  • Doğan MK, Bozdemir G (2014) The effects of credibility on interest rates in Turkey. Eurasian J Bus Econ 7(14):71–90

    Article  Google Scholar 

  • Fatás A, Mihov I (2003a) On constraining fiscal policy discretion in EMU. Oxf Rev Econ Policy 19(1):112–131

    Article  Google Scholar 

  • Fatás A, Mihov I (2003b) The case for restricting fiscal policy discretion. Q J Econ 118(4):1419–1447

    Article  Google Scholar 

  • Fatás A, Mihov I (2009) The euro and fiscal policy. NBER Working Papers 14722, 37 p

  • Faust J, Svensson L (2001) Transparency and credibility: monetary policy with unobservable goals. Int Econ Rev 42(2):369–397

    Article  Google Scholar 

  • Fernandes C (2013) The credibility of the monetary policy in Brazil: an econometric time series analysis approach. Msc in Economics. Universiteit Van Amsterdam, Thesis

  • Gómez JP, Uribe J, Vargas H (2002) The implementation of inflation targeting in Colombia. Borradores de Economía 202:1–62

    Google Scholar 

  • Greene WH (1993) Econometric analysis, 5th edn. Prentice Hall, New Jersey

    Google Scholar 

  • Hall AR (2015) Econometricians have their moments: GMM at 32. Econ Rec 91(S1):1–24

    Article  Google Scholar 

  • Hamann F, Hofstetter M, Urrutia M (2014) Inflation targeting in Colombia, 2002–2012. Borradores de Economía, N. 818

  • Junguito R, Rincón H (2004) La política fiscal en el siglo XX en Colombia. Borradores de Economía, 318. Banco de la República, Colombia

  • Khemiri R, Ali MSB (2012) Exchange rate pass-through and inflation dynamics in Tunisia: a Markov-switching approach. Economics Discussion Papers 2012-39, Kiel Institute for the World Economy

  • Koop G, Pesaran MH, Potter SM (1996) Impulse response analysis in non-linear multivariate models. J Econom 74(1):119–147

    Article  Google Scholar 

  • Leeper E (1991) Equilibria under ’active’ and ’passive’ monetary and fiscal policies. J Monet Econ 27(1):129–147

    Article  Google Scholar 

  • López E, Montes E, Garavitom A, Collazos M (2013) La economía petrolera en Colombia. Relaciones intersectoriales e importancia en la economía nacional. Borradores de Economía, No. 566, Banco de la República, Colômbia

  • Lózano L (2009) Caracterización de la política fiscal en Colombia y análisis de su postura frente a la crisis internacional. Borradores de Economía, No. 566, Banco de la República, Colômbia

  • Lózano L, Toro J (2007) Fiscal policy throughout the cycle: the Colombian experience. Ensayos sobre política económica 25(55):12–39

    Google Scholar 

  • Lucotte Y (2009) Central bank independence and budget deficits in developing countries: new evidence from panel data analysis. Document de Recherche du LEO, No. 2009-19. Orleans, pp 1–33

  • Lucotte Y (2012) Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation. Econ Syst 36(4):609–628

    Article  Google Scholar 

  • Lin S, Ye H (2009) Does inflation targeting make a difference in developing countries? J Dev Econ 89(1):118–123

    Article  Google Scholar 

  • Masson P, Savastano M, Sharma S (1997) The scope for inflation targeting in developing countries. International Monetary Fund, Working Paper, 97, 130, pp 1–53

  • Minea A, Tapsoba R (2014) Does inflation targeting improve fiscal discipline? J Int Money Finance 40(C):185–203

    Article  Google Scholar 

  • Montes GC (2013) Credibility and monetary transmission channels under inflation targeting: an econometric analysis from a developing country. Econ Model 30(C):670–684

    Article  Google Scholar 

  • Moody’s Investors Service (2014) Moody’s upgrades Colombia’s rating to Baa2 from Baa3; outlook stable. July. (Rating Action: Colombia). Disponível, mediante registro gratuito, em: http://www.moodys.com/

  • Perilla JR (2010) El Impacto de los Precios del Petróleo Sobre el Crecimiento Económico en Colombia. Revista de economia del Rosario 13(1):75–116

    Google Scholar 

  • Pesaran MH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29

    Article  Google Scholar 

  • Rodrick D (1998) Why do more open economies have bigger governments? J Polit Econ 106(5):997–1032

    Article  Google Scholar 

  • Salle I, Senegas MA, Yildizoglu M (2013) Inflation targeting in a learning economy: an ABM perspective. Econ Model 34(3):114–128

    Article  Google Scholar 

  • Sargent TJ (1994) Rational expectations and the reconstruction of macroeconomics. In: Miller PJ (ed) The rational expectations revolution: readings from the front line. MIT Press, Cambridge

    Google Scholar 

  • Vargas H (2005) Exchange rate policy and inflation targeting in Colombia. Research Department Publications 4425, Inter-American Development Bank, Research Department

  • Villar L, Forero D (2014) Escenarios de vulnerabilidad fiscal para la economía colombiana. Fedesarrollo, Colômbia

    Google Scholar 

  • Walsh JP, Yu J (2010) Determinants of foreign direct investment: a sectoral and institutional approach. International Monetary Fund, Working Paper, 10, 187, pp 1–28

  • Wei S (2000) How taxing is corruption on international investors? Rev Econ Stat 82(1):1–11

    Article  Google Scholar 

  • Wooldridge J (2001) Applications of generalized method of moments estimation. J Econ Perspect 15(4):87–100

    Article  Google Scholar 

  • Wyplosz C (2005) Fiscal discipline in EMU: rules or institutions? Natl Inst Econ Rev 191:61–78

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Universidad Pontifica Bolivariana, Circular 1 No. 70-01, Medellín, Colombia

    Juan Camilo Galvis Ciro

  2. Department of Economics, Fluminense Federal University and National Council for Scientific and Technological Development (CNPq), Rua Dr. Sodré, 59, Vila Suíça, Miguel Pereira, Rio de Janeiro, CEP: 26900-000, Brazil

    Helder Ferreira de Mendonça

Authors
  1. Juan Camilo Galvis Ciro
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Helder Ferreira de Mendonça
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Helder Ferreira de Mendonça.

Additional information

We thank an Associate Editor and an anonymous referee for helpful comments on an earlier version of this paper. Any remaining errors are the sole responsibility of the authors.

Appendix

Appendix

See Tables 5, 6, 7, 8 and 9.

Table 5 Sources of data and description of the variables
Full size table
Table 6 Specification (RESET), heteroskedasticity (BPG), and autocorrelation (LM) tests
Full size table
Table 7 List of GMM instruments
Full size table
Table 8 Descriptive statistics
Full size table
Table 9 Unit root tests (ADF, PP, and KPSS)
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ciro, J.C.G., de Mendonça, H.F. Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia. Empir Econ 53, 1529–1552 (2017). https://doi.org/10.1007/s00181-016-1177-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-016-1177-2

Keywords

JEL Classification

Search

Navigation