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A Solution to Fiscal Procyclicality: the Structural Budget Institutions Pioneered by Chile

Listed author(s):
  • Jeffrey Frankel

This paper assesses official government forecasts of the future performance of the economy and public accounts of a large sample of countries. The main finding is that official GDP and budget forecasts tend to be—on average—overoptimistic, and that the bias is larger at longer horizons and during economic booms. The conclusion is that official forecasts, if not shielded from political pressures, tend to embellish predictions, and the problem is magnified if the government is formally subject to a budget rule. The essential innovation that has permitted Chile to implement a countercyclical fiscal policy and generate surpluses during booms is not just the structural rule per se, but the regime that entrusts an independent panel of experts the responsibility of estimating how far current copper prices and GDP have diverted from their long-time averages.

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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 14 (2011)
Issue (Month): 2 (August)
Pages: 39-78

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Handle: RePEc:chb:bcchec:v:14:y:2011:i:2:p:39-51
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