How much fiscal adjustment is enough? The case of Colombia

This paper concludes that Colombia's impressive fiscal adjustment during 1985 - 1987 was due to structural changes in fiscal policy, not simply to such fortuitous events as the coffee boom. Although impressive, the fiscal adjustment fell short of actually improving the government's net financial position. Total public debt as a percentage of GDP was roughly unchanged, even after correcting for the effect of currency devaluation on dollar denominated instruments. Public development lending as a percentage of GDP fell slightly during the same period. The model simulations suggest that to reduce interest rates to more manageable levels would require continued reduction of the fiscal deficit, below levels currently envisioned. To reduce inflation would require even tighter fiscal policy. The magnitudes of required deficit reduction do not seem out of reach however, even allowing for uncertainty about the figures.Economic Stabilization,Economic Theory&Research,Banks&Banking Reform,Macroeconomic Management,Financial Intermediation