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A Solution to Fiscal Procyclicality: the Structural Budget Institutions Pioneered by Chile

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  • Jeffrey Frankel

Abstract

This paper assesses official government forecasts of the future performance of the economy and public accounts of a large sample of countries. The main finding is that official GDP and budget forecasts tend to be—on average—overoptimistic, and that the bias is larger at longer horizons and during economic booms. The conclusion is that official forecasts, if not shielded from political pressures, tend to embellish predictions, and the problem is magnified if the government is formally subject to a budget rule. The essential innovation that has permitted Chile to implement a countercyclical fiscal policy and generate surpluses during booms is not just the structural rule per se, but the regime that entrusts an independent panel of experts the responsibility of estimating how far current copper prices and GDP have diverted from their long-time averages.

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Bibliographic Info

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

Volume (Year): 14 (2011)
Issue (Month): 2 (August)
Pages: 39-78

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Handle: RePEc:chb:bcchec:v:14:y:2011:i:2:p:39-51

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Fiscal Policy in Developing Countries: Escape from Procyclicality
    by Mark Thoma in Economist's View on 2011-06-24 07:24:00
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Cited by:
  1. Annabelle Mourougane, 2011. "Refining Macroeconomic Policies to Sustain Growth in Brazil," OECD Economics Department Working Papers 899, OECD Publishing.
  2. Georgia Kaplanoglou & Vassilis T. Rapanos, 2013. "Fiscal Deficits and the Role of Fiscal Governance: The case of Greece," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 43(1), pages 5-30, March.
  3. Carlos A. Vegh & Guillermo Vuletin, 2012. "Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets," NBER Working Papers 18175, National Bureau of Economic Research, Inc.
  4. Sorrentino, Angelica & Thomasz, Esteban Otto, 2014. "Incidencia del Complejo Sojero: Implicancias en el Riesgo Macroeconómico
    [Macroeconomic Risk: The incidence of soy exports in Argentina between 2003 and 2012]
    ," MPRA Paper 55767, University Library of Munich, Germany.
  5. Beetsma, Roel & Bluhm, Benjamin & Giuliodori, Massimo & Wierts, Peter, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," CEPR Discussion Papers 8413, C.E.P.R. Discussion Papers.
  6. Cordella, Tito & Federico, Pablo & Vegh, Carlos & Vuletin, Guillermo, 2014. "Reserve requirements in the brave new macroprudential world," Policy Research Working Paper Series 6793, The World Bank.
  7. Roel Beetsma & Benjamin Bluhm & Massimo Giuliodori & Peter Wierts, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," Tinbergen Institute Discussion Papers 11-080/2, Tinbergen Institute.

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