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A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries

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  • Frankel, Jeffrey A.

    (Harvard University)

Abstract

American fiscal policy has been procyclical: Washington wasted the expansion period 2001-2007 by running budget deficits, but by 2011 had come to feel constrained by inherited debt to withdraw fiscal stimulus. Chile has achieved countercyclical fiscal policy - saving in booms and easing in recession - during the same decade that rich countries forgot how to do so. Chile has a rule that targets a structural budget balance. But rules are not credible by themselves. In Europe and the U.S., official forecasts are overly optimistic in booms; so revenue is spent rather than saved. Chile avoids such wishful thinking by having independent panels of experts decide what is structural and what is cyclical.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp11-014.

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Date of creation: Feb 2011
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Handle: RePEc:ecl:harjfk:rwp11-014

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