Fiscal rules and economic size in Latin America and the Caribbean

This book provides analytical and practical criteria for the design of fiscal rules in small economies in Latin America and the Caribbean (LAC). The fiscal positions of most LAC countries have deteriorated in the last decade. The region's average fiscal deficit rose from 1.9 percent of GDP in 2001-08 to 3.6 percent in 2009-17, pushing the average public debt stock from 40 percent of GDP in 2008 to 62 percent in 2017. Small countries in LAC have had especially larger fiscal deficits and accelerated indebtedness. Fiscal rules represent a promising policy option for smaller LAC economies. Given their greater exposure to volatility from frequent and intense natural disasters and terms of trade shocks, smaller economies can obtain larger benefits from using fiscal rules which enhance the sustainability, predictability, and credibility of fiscal policy. If well designed, these rules enable flexibility to mitigate the impact of adverse shocks. While the need for fiscal rules to ensure fiscal sustainability is well recognized, the relative advantages and drawbacks of different types of fiscal rules vary with each country's macroeconomic characteristics. This study provides analytical criteria for selecting fiscal rules or sets of rules best suited to a country's business cycle features, exchange rate regime, type of shocks faced, and institutional characteristics. It reviews the performance of fiscal rules worldwide and assesses which rule types are most frequently used, have the best record for compliance, and are the most effective in promoting debt sustainability and preventing procyclical fiscal policies, while also presenting the features that tend to improve their performance.