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Chile's Structural Fiscal Surplus Rule

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  • Michael Kumhof
  • Douglas Laxton

Abstract

The paper analyzes Chile''s structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF''s Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile''s current fiscal rule performs well if the policymaker puts a small weight on output volatility (relative to inflation volatility) in his/her objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile''s adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in GDP.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/88.

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Length: 54
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/88

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Related research

Keywords: Current account surpluses; Copper; Economic models; fiscal policy; tax revenue; labor income; budget constraint; fiscal accounts; fiscal instruments; tax rates; fiscal rule; marginal propensity to consume; the marginal propensity to consume; government spending; structural fiscal; investment spending; capital income; fiscal surplus; aggregate consumption; taxation; consumption goods; fiscal responsibility; real interest rate; consumption tax; fiscal responsibility law; consumption spending; current consumption; government budget constraint; budget constraints; government budget; capital accumulation; aggregate demand; fiscal rules; consumption tax revenue; fiscal policy rules; fiscal balance; consumption taxes; fiscal variables; fiscal policies; fiscal revenue; fiscal model; tax base; fiscal instrument; fiscal policy rule; substitution effect; budget deficits; fiscal surpluses; tax reductions; fiscal stimulus; aggregate income; current income; expansionary fiscal; public investment spending; household wealth; reduction in consumption; fiscal authorities; fiscal deficits; general equilibrium; household budget; fiscal shocks; tax systems; tax revenues; fiscal side; annual expenditures; income effect; consumption demand; investment demand; future consumption; account deficits; tax income; government expenditures; taxes on labor; tax payments; marginal utility of consumption; current investment; fiscal consolidation;

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References

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  1. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
  2. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  3. Yongsung Chang & Sun-Bin Kim, 2005. "On the aggregate labor supply," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-37.
  4. Enrique G. Mendoza, 2006. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," IMF Working Papers 06/88, International Monetary Fund.
  5. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2005. "Expansionary Fiscal Shocks and the US Trade Deficit," International Finance, Wiley Blackwell, vol. 8(3), pages 363-397, December.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  7. Peter N. Ireland, 1999. "Sticky-Price Models of the Business Cycle: Specification and Stability," Boston College Working Papers in Economics 426, Boston College Department of Economics.
  8. Christopher Erceg & Luca Guerrieri, 2005. "Expansionary Fiscal Shocks and the Trade Deficit," Computing in Economics and Finance 2005 128, Society for Computational Economics.
  9. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  10. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Mourinho Félix, Ricardo & Almeida, Vanda & Castro, Gabriela, 2008. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," MPRA Paper 13945, University Library of Munich, Germany.
  2. Jens R. Clausen, 2008. "Calculating Sustainable Non-Mineral Balances As Benchmarks for Fiscal Policy," IMF Working Papers 08/117, International Monetary Fund.
  3. Eric M. Leeper, 2009. "Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle," NBER Working Papers 15514, National Bureau of Economic Research, Inc.

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