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Mr. Yehenew Endegnanew, Charles Amo-Yartey, and Ms. Therese Turner-Jones

Abstract

This chapter examines the empirical link between fiscal policy and the current account focusing on microstates, defined as countries with a population of less than 2 million between 1970 and 2009. The extent to which fiscal adjustment can lead to predictable development in the current account remains controversial, with two competing views. The traditional view argues that changes in fiscal policy are associated with changes in the current account through a number of channels that are discussed in the literature review. The traditional view is challenged by the Ricardian equivalence principle, which states that an increase in budget deficit (through reduced taxes) will be offset by increases in private saving, insofar as the private sector fully discounts the future tax liabilities associated with financing the fiscal deficit, hence not affecting the current balance.

Garth Peron Nicholls

Abstract

This chapter reviews the current public debt and debt management characteristics of Caribbean economies. In particular, it reviews the debt profile in the region and assesses whether the structure of public debt offsets the risks emanating from the high public debt ratios. It also briefly discusses estimates of selected contingent fiscal liabilities and reviews the institutional framework for debt management.

Charles Amo-Yartey and Ms. Therese Turner-Jones

Abstract

This chapter concludes the analysis in this book with an agenda for moving the region forward, drawing on the discussions of preceding chapters and the accompanying empirical analyses. While a survey of current policies through the Caribbean suggests that there is plenty of work yet to do on the fiscal sustainability agenda, the lack of an economic recovery in the presence of high debt for many countries calls for action. While each country will need to tailor its specific strategy, we outline below some key elements that should be part of any medium-term framework that countries in the region may consider adopting. Already, some countries are responding to the need for action by independently selecting some elements of the menu proposed in this book and putting them in place to meet their debt reduction targets. These include some difficult and complex new institutional arrangements, such as Jamaica’s proposals for implementing a new fiscal rule.

Joel Chiedu Okwuokei, Charles Amo-Yartey, and Mr. Machiko Narita

Abstract

Countries in the Caribbean have undertaken fiscal consolidation at various times with the primary objective of putting the debt-to-GDP ratio on a sustainable downward trajectory. Yet public debt levels in most of these countries remain high today, suggesting that past and ongoing fiscal consolidation efforts have not yielded durable benefits. Some questions immediately come to mind. Why are public debts levels not falling as one would expect? Would it be connected with the Caribbean approach to fiscal consolidation, country-specific circumstances, or some challenges unique to the region? What are the characteristics of fiscal consolidation in the region, and how different are they from the experiences around the world?

Joel Chiedu Okwuokei

Abstract

A number of governments across the world have adopted fiscal policy rules, especially against the backdrop of worsening fiscal performances and rising debt levels. Recently, following the financial crisis, fiscal rules have been advocated to support fiscal consolidation efforts and to ensure long-term sustainability of government finances. This chapter empirically analyzes the impacts of fiscal rules on fiscal performance in microstates with a focus on the Caribbean, where fiscal consolidation has been a major challenge. Broadly, we address three questions. Are there fiscal rules in microstates in general, and in the Caribbean in particular? If the answer is yes, what types of rules exist and what are their characteristics? Is the existence of fiscal rules in microstates associated with improved fiscal performance?

Mr. Machiko Narita

Abstract

The recent global financial crisis has drawn renewed attention to the effectiveness of fiscal policy, as many countries implemented fiscal stimulus measures to boost economic activity. The effectiveness of fiscal policy is often assessed by the size of fiscal multipliers, which measure a change in output caused by an exogenous change in government spending or tax revenue. This chapter estimates fiscal multipliers for the Caribbean using quarterly data for 14 Caribbean countries,1 and investigates key determinants of the size of the multipliers. The results show that fiscal multipliers in the sample countries are modest, and that the high levels of trade openness and public debt account for their modest size.