Felipe Larraín () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
Abstract
This paper studies the relationship between stabilization programs, the exchange rate and public sector revenue in the Latin American context. High inflations and hyperinflations in the region have resulted from major fiscal imbalances, not only in the form of excessive spending but also -and many times even more important- in the form of low revenues. Stabilization thus requires substituting the inflation tax for other legislated taxes to increase public sector revenue. Another aspect of stabilization discussed here is the necessary increase in public sector tariffs on goods and services from levels well below the opportunity cost of resources. Following a conceptual discussion of these issues, the paper develops a simple, general equilibrium model to assess empirically the effect of exchange rate changes on public sector revenue. The model is used for simulations under different degrees of wage indexation, and serves to illustrate the mechanisms by which a revaluation (devaluation) hurts (improves) fiscal revenue. Quantitatively, a 5% revaluation of the exchange rate is shown to produce a 1.7% decline in public revenue.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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