Chile’s Fiscal Rule as Social Insurance
We explore the role of fiscal policy over the business cycle from a normative perspective, for a government with a highly volatile and exogenous revenue source. Instead of resorting to Keynesian mechanisms, in our framework fiscal policy plays a role because the government provides transfers to heterogeneous households facing volatile income, albeit with an imperfect transfer technology (a fraction of transfers leak to richer households). We calibrate the model to Chile’s highly volatile government revenues derived from copper, and characterize the optimal fiscal reaction. We quantify the welfare gains vis-à-vis a balanced budget rule, and the degree of adequate fiscal countercyclicality. We also analyze simpler rules, such as the structural balance rule in place in Chile during the last decade, more general linear rules, and linear rules with an escape clause. We find that the optimal rule leads to the same welfare gain as doubling the government’s copper revenues under a balanced budget rule. Chile’s structural balance rule achieves 18% of these gains, while a linear rule with an escape clause achieves 83% of the gains. The degrees of countercyclicality of the optimal rule and the linear rule with an escape clause are similar, and much larger than those of the structural balance rule.
|Date of creation:||May 2011|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
- Zeldes, Stephen P, 1989.
"Consumption and Liquidity Constraints: An Empirical Investigation,"
Journal of Political Economy,
University of Chicago Press, vol. 97(2), pages 305-346, April.
- Stephen Zeldes, "undated". "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
- Stephen P. Zeldes, "undated". "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
- Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-1137, December.
- Orazio P. Attanasio & Martin Browning, 1993. "Consumption over the Life Cycle and over the Business Cycle," NBER Working Papers 4453, National Bureau of Economic Research, Inc.
- Attanasio, O.P. & Browning, M.J., 1993. "Consumption over the life cycle and over the business cycle," Discussion Paper 1993-14, Tilburg University, Center for Economic Research.
- Attanasio, O.P. & Browning, M., 1993. "Consumption Over the Life Cycle and Over the Business Cycle," Papers 9314, Tilburg - Center for Economic Research.
- Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December.
- Atkeson, A. & Ogaki, M., 1991. "Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data," RCER Working Papers 303, University of Rochester - Center for Economic Research (RCER).
- Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
- Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
- Rodrigo O. Valdes & Eduardo M Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
- Engel, Eduardo & Valdés, Rodrigo O., 2001. "Optimal fiscal strategy for oil exporting countries," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34818, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
- Eduardo M.R.A. Engel & Rodrigo Valdés, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," Documentos de Trabajo 78, Centro de Economía Aplicada, Universidad de Chile.
- Alonso A Segura Vasi, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis; The Case of São Tomé and Príncipe," IMF Working Papers 06/183, International Monetary Fund.
- Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries; A Welfare-Based Assessment," IMF Working Papers 09/126, International Monetary Fund.
- Nicoletta Batini & Paul Levine, 2008. " Monetary and Fiscal Rules in an Emerging Small Open Economy," CDMA Conference Paper Series 0810, Centre for Dynamic Macroeconomic Analysis.
- Paul L Levine & Joseph G Pearlman & Nicoletta Batini, 2009. "“Monetary and Fiscal Rules in an Emerging Small Open Economy”," IMF Working Papers 09/22, International Monetary Fund.
- Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, February. Full references (including those not matched with items on IDEAS)