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Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario

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  • Ojeda-Joya, Jair N.
  • Parra-Polanía, Julián A.
  • Vargas, Carmiña O.

Abstract

We analyze the welfare effects of alternative fiscal rules in the context of shocks to the commodity sector of a commodity-rich country. We build a DSGE model featuring three productive sectors (non-tradable, manufacturing and commodities), government and two types of consumers, according to whether or not they have access to financial markets (Ricardians and non-Ricardians, respectively). The model is calibrated and estimated using Bayesian methods and macroeconomic data from Colombia. Our results show that while non-Ricardian consumers have welfare gains from countercyclical fiscal rules, Ricardian consumers incur in considerable welfare losses from this type of policy. The specific quantitative results of our welfare evaluation are driven by the structural parameters estimated for the Colombian economy. In particular, the estimated persistence of the productivity shock is relatively low and implies lower welfare changes compared to similar studies for other countries.

Suggested Citation

  • Ojeda-Joya, Jair N. & Parra-Polanía, Julián A. & Vargas, Carmiña O., 2016. "Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario," Economic Modelling, Elsevier, vol. 52(PB), pages 859-866.
  • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pb:p:859-866
    DOI: 10.1016/j.econmod.2015.10.022
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    5. King Yoong Lim & Shuonan Zhang, 2020. "Commodity Shocks and Optimal Fiscal Management of Resource Revenue in an Economy with State-owned Enterprises," NBS Discussion Papers in Economics 2020/02, Economics, Nottingham Business School, Nottingham Trent University.

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