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Chile’s Structural Fiscal Surplus Rule: a Model – Based Evaluation

  • Michael Kumhof; Douglas Laxton

The paper analyzes Chile’s structural surplus fiscal rule in the face of shocks to the world copper price. Two results are obtained. First, Chile’s current fiscal rule performs well if the policymaker (i) puts a premium on avoiding excessive volatility in fiscal instruments, and (ii) puts a relatively 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-o¤ with somewhat higher inflation volatility and much higher instrument volatility. The ranking of instruments between government spending and labor income taxes depends mainly on the instrument volatility the policymaker will tolerate. Second, given its then current stock of government assets, Chile’s adoption of a 0.5% surplus target starting in 2008 was desirable 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 macroeconomic variables.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 602.

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Date of creation: Dec 2010
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Handle: RePEc:chb:bcchwp:602
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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. 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.
  3. 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.
  4. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
  5. R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," Working Papers 50018, American Enterprise Institute.
  6. Christopher Erceg & Luca Guerrieri, 2005. "Expansionary Fiscal Shocks and the Trade Deficit," Computing in Economics and Finance 2005 128, Society for Computational Economics.
  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. Carlos Garcia & Jorge Restrepo & Evan Tanner, 2007. "Designing fiscal rules for commodity exporters," ILADES-Georgetown University Working Papers inv199, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  9. Michael Kumhof & Douglas Laxton, 2009. "Simple, Implementable Fiscal Policy Rules," IMF Working Papers 09/76, International Monetary Fund.
  10. Yongsung Chang & Sun-Bin Kim, 2005. "On the aggregate labor supply," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-37.
  11. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen & Susanna, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
  12. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
  13. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
  14. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  15. 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.
  16. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile 458, Central Bank of Chile.
  17. Juan de Dios Tena & César Salazar, 2008. "Explaining inflation and output volatility in Chile: an empirical analysis of forty years," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID.
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