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Non-Ricardian Aspects of Fiscal Policy in Chile

  • Luis Felipe Céspedes C.
  • Jorge A. Fornero
  • Jordi Galí

This paper examines non-Ricardian effects of government spending shocks in the Chilean economy. We first provide evidence on those effects based on vector autoregressions. We then show that such evidence can be accounted for by a model that features: (i) a sizeable share of non-Ricardian households (i.e. households which do not make use of financial markets and just consume their current labor income); (ii) nominal price and wage rigidities; (iii) an inflation targeting scheme and (iv) a structural balance fiscal rule that reflects the particular Chilean fiscal rule. The model is estimated employing Bayesian techniques. Finally, we use model simulations to demonstrate the countercyclical effects of the Chilean fiscal rule as compared with a zero-deficit rule.

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File URL: http://www.bcentral.cl/eng/studies/economia-chilena/2011/aug/recv14n2ago2011pp79-107.pdf
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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: 79-107

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Handle: RePEc:chb:bcchec:v:14:y:2011:i:2:p:79-107
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  1. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  2. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  3. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  4. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  5. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
  6. N. Gregory Mankiw, 1999. "The Savers-Spenders Theory of Fiscal Policy," Harvard Institute of Economic Research Working Papers 1888, Harvard - Institute of Economic Research.
  7. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 3-29, January.
  8. Adjemian, Stéphane & Darracq Pariès, Matthieu & Smets, Frank, 2008. "A quantitative perspective on optimal monetary policy cooperation between the US and the euro area," Working Paper Series 0884, European Central Bank.
  9. Jorge A. Fornero, 2010. "Ricardian Equivalence Proposition in a NK DSGE Model for two Large Economies: The EU and the US," Working Papers Central Bank of Chile 563, Central Bank of Chile.
  10. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
  11. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  12. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  13. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Stabilization policy and the costs of dollarization," Proceedings, Federal Reserve Bank of Cleveland, pages 482-517.
  14. Carlos Garcia & Jorge Restrepo, 2007. "The Case for a Countercyclical Rule-based Fiscal Regime," ILADES-Georgetown University Working Papers inv183, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  15. Coenen, Günter & McAdam, Peter & Straub, Roland, 2007. "Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model," Working Paper Series 0747, European Central Bank.
  16. Pablo Pincheira, 2012. "Are Forecast Combinations Efficient?," Working Papers Central Bank of Chile 661, Central Bank of Chile.
  17. Rodrigo Alfaro & Natán Goldberger, 2012. "Cubrir o no Cubrir: ¿Ese es el Dilema?," Working Papers Central Bank of Chile 662, Central Bank of Chile.
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