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Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario

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  • Ojeda-Joya, Jair N.
  • Parra-Polanía, Julián A.
  • Vargas, Carmiña O.

Abstract

We analyze the welfare effects of alternative fiscal rules in the context of shocks to the commodity sector of a commodity-rich country. We build a DSGE model featuring three productive sectors (non-tradable, manufacturing and commodities), government and two types of consumers, according to whether or not they have access to financial markets (Ricardians and non-Ricardians, respectively). The model is calibrated and estimated using Bayesian methods and macroeconomic data from Colombia. Our results show that while non-Ricardian consumers have welfare gains from countercyclical fiscal rules, Ricardian consumers incur in considerable welfare losses from this type of policy. The specific quantitative results of our welfare evaluation are driven by the structural parameters estimated for the Colombian economy. In particular, the estimated persistence of the productivity shock is relatively low and implies lower welfare changes compared to similar studies for other countries.

Suggested Citation

  • Ojeda-Joya, Jair N. & Parra-Polanía, Julián A. & Vargas, Carmiña O., 2016. "Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario," Economic Modelling, Elsevier, vol. 52(PB), pages 859-866.
  • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pb:p:859-866
    DOI: 10.1016/j.econmod.2015.10.022
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    3. Vo Phuong Mai Le & Ruthira Naraidoo, 2019. "Monetary policy in a Model with Commodity and Financial Markets," Working Papers 201928, University of Pretoria, Department of Economics.
    4. Hernán Rincón-Castro & Juan Pablo Ángel-Mojica, 2023. "¿Sobre quién recaería la carga de reducir el impuesto sobre la renta de las empresas?," Borradores de Economia 1260, Banco de la Republica de Colombia.
    5. Medina, Juan Pablo & Toni, Emiliano & Valdes, Rodrigo, 2023. "The Art and Science of Monetary and Fiscal Policies in Chile," MPRA Paper 117198, University Library of Munich, Germany, revised 28 Apr 2023.
    6. Naraidoo, Ruthira & Paez-Farrell, Juan, 2023. "Commodity price shocks, labour market dynamics and monetary policy in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    7. Medina, Juan Pablo & Soto, Claudio, 2016. "Commodity prices and fiscal policy in a commodity exporting economy," Economic Modelling, Elsevier, vol. 59(C), pages 335-351.
    8. García-Suaza, A & Gómez, M & Jaramillo, F, 2021. "Fiscal policy and informality in Colombia," Documentos de trabajo - Alianza EFI 19416, Alianza EFI.
    9. King Yoong Lim & Shuonan Zhang, 2023. "Optimal fiscal management in an economy with resource revenue‐financed government‐linked companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2202-2225, April.

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