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Chile’s Structural Fiscal Surplus Rule: a Model-Based Evaluation

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  • Michael Kumhof
  • Douglas Laxton

Abstract

The paper analyzes Chile’s structural surplus fiscal rule in the face of shocks to the world copper price. Two results are obtained. First, Chile’s current fiscal rule performs well if the policymaker (i) puts a premium on avoiding excessive volatility in fiscal instruments, and (ii) puts a relatively small weight on output volatility relative to inflation volatility in the objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with somewhat higher inflation volatility and much higher instrument volatility. The ranking of instruments between government spending and labor income taxes depends mainly on the instrument volatility the policymaker will tolerate. Second, given its then current stock of government assets, Chile’s adoption of a 0.5% surplus target starting in 2008 was desirable because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in macroeconomic variables

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 13 (2010)
Issue (Month): 3 (December)
Pages: 5-32

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Handle: RePEc:chb:bcchec:v:13:y:2010:i:3:p:5-32

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  1. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  2. Carlos Garcia & Jorge Restrepo & Evan Tanner, 2007. "Designing fiscal rules for commodity exporters," ILADES-Georgetown University Working Papers inv199, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  3. Yongsung Chang & Sun-Bin Kim, 2005. "On the aggregate labor supply," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-37.
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  7. Enrique G. Mendoza, 2006. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," IMF Working Papers 06/88, International Monetary Fund.
  8. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  9. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jens R. Clausen, 2008. "Calculating Sustainable Non-mineral Balances as Benchmarks for Fiscal Policy: The Case of Botswana," IMF Working Papers 08/117, International Monetary Fund.
  2. Vanda Almeida & Gabriela Lopes de Castro & Ricardo Mourinho Félix, 2008. "Improving Competition in the Non-Tradable Goods and Labour Markets: The Portuguese Case," Working Papers w200816, Banco de Portugal, Economics and Research Department.
  3. Eric M. Leeper, 2009. "Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle," NBER Working Papers 15514, National Bureau of Economic Research, Inc.

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