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Designing fiscal rules for commodity exporters

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Abstract

We compare welfare levels under two alternative fiscal rules: a procyclical balanced budget policy and an acyclical structural surplus (government accumulates assets). We use a dynamic, stochastic, general equilibrium model. The acylical rule benefits households that do not enjoy access to capital markets. It provides a financial cushion that they themselves cannot provide, while also boosting their mean consumption. By contrast, households that enjoy full access to capital markets suffer under this rule. Effectively, the government usurps their previous role in smoothing consumption and accumulating assets. However, a policy in between these extremes may be preferred by all.

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Bibliographic Info

Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv199.

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Length: 41 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:ila:ilades:inv199

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Keywords: welfare; small open economy; fiscal rules; rule of thumb consumers; government spending.;

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  1. Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
  4. Evan Tanner & Kevin Joseph Carey, 2005. "The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output," IMF Working Papers 05/207, International Monetary Fund.
  5. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers 5212, C.E.P.R. Discussion Papers.
  6. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
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Cited by:
  1. Benjamin Born & Johannes Pfeifer, 2013. "Policy Risk and the Business Cycle," CESifo Working Paper Series 4336, CESifo Group Munich.
  2. Michael Kumhof; Douglas Laxton, 2010. "Chile’s Structural Fiscal Surplus Rule: a Model – Based Evaluation," Working Papers Central Bank of Chile 602, Central Bank of Chile.
  3. Jair N. OJeda & Julián A. Parra Polanía & Carmiña O. Vargas, 2014. "Natural-Resource Booms, Fiscal Rules and Welfare in a Small Open Economy," Borradores de Economia 807, Banco de la Republica de Colombia.

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