Effects of the Exchange Rate on the Fiscal Deficit: A Stochastic Mean-Reverting Jump-Diffusion Model for the Colombian Case

DOI:  https://doi.org/10.12804/revistas.urosario.edu.co/economia/a.7194
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Published: Oct 10, 2018
Issue: Vol. 21 No. 2 (2018): julio-diciembre
Section Articles


Keywords: Déficit fiscal , tipo de câmbio , processos estocásticos , simulação Monte Carlo. Fiscal deficit , exchange rate , stochastic processes , Monte Carlo simulation. déficit fiscal , tipo de cambio , procesos estocásticos , simulación de Montecarlo.

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Authors

Clark Granger-Castaño Banco de la República
Jhon Fredy Moreno-Trujillo Universidad Externado de Colombia
Francisco Venegas-Martínez Instituto Politécnico Nacional
Abstract

The most used methods to assess the impact of the exchange rate on the fiscal deficit are deterministic and are based on the elasticities of each of the variables affecting the deficit. This provides a very limited idea of the magnitude and direction of future shocks. This research develops a stochastic model useful to evaluate the impact of the exchange rate on the fiscal deficit in an environment of uncertainty. To do this, the dynamics of the exchange rate depreciation is driven by a mean-reverting jump-diffusion process. By using the theoretical proposed model, Monte Carlo simulations of the projections of the deficit of the Central National Government of Colombia (cngc) are carried out. The simulation provides estimates of fiscal targets considering the random effects of the exchange rate. Finally, from the obtained projections, a path of government debt is estimated based on the depreciation of the exchange rate, which is useful for the planning of the cngc expenditure and for the statement of fiscal goals.

How to Cite
Granger-Castaño, C., Moreno-Trujillo, J. F., & Venegas-Martínez, F. (2018). Effects of the Exchange Rate on the Fiscal Deficit: A Stochastic Mean-Reverting Jump-Diffusion Model for the Colombian Case. Revista Economía Del Rosario, 21(2), 193–218. https://doi.org/10.12804/revistas.urosario.edu.co/economia/a.7194
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