Multiple shocks since the Great Recession have had harsh effects on public finances in both developed and emerging and developing (ED) countries. The Bank of International Settlements, the World Bank and the International Monetary Fund now see fiscal consolidation as the primary goal of national governments. In this paper, we estimate Fiscal Response Functions, i.e., the reaction of fiscal policy and public budget to accumulated debt, for developed and ED economies. Our analysis covers the 1980 to 2018 time spell and adopts a two-stage least squares strategy. We use the cyclically-adjusted primary balance (CAPB) as dependent variable to control for business cycle's effects on the public budget via automatic stabilizers. We expand previous works by considering the role played by the structural features of the economy, namely its productive structure, and by global factors in determining structural fiscal balances. We obtain three main results. First, manufacturing development consistently emerges as a core determinant of improved CAPB and strengthened fiscal solidity in both developed and ED countries. Second, ED and developed countries respond asymmetrically to accumulated debt stocks. Pressures to undertake fiscal adjustments and debt intolerance emerge much earlier in the former than in the latter. Third, global factors play a more relevant role in ED countries than in developed ones. On average, the accumulation of negative net portfolio positions on international financial markets may induce ED countries to pursue more restrictive discretionary fiscal policies. However, periods of financial “bonanza”, i.e., unusually large surges in net portfolio inflows, may cause pro-cyclical fiscal stances. The opposite holds true for advanced economies. Our analysis suggests that it may be hard to remove fiscal policy from hardships in poorly developed productive systems. Moreover, ED countries should pursue trade and financial integration in the global economy with significant degrees of caution.
Keywords: Fiscal response function; Public debt; Structural change
JEL classification: E62 H30 H63 O11
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