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The Case for a Countercyclical Rule-based Fiscal Regime

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Abstract

We build a general equilibrium model of a small open economy, with the purpose of analyzing the effects of a countercyclical rule-based fiscal regime, which corresponds to a stylized version of the structural balance in place in Chile. The economy exports a domestically-produced good and one natural resource (commodity), which is partly state-owned, generating income to the government. We analyze how shocks are transmitted to the economy in the presence of this fiscal rule by introducing shocks to government spending, taxes, and the price of the natural resource. In the last shock, we compare our structural rule with a case where the budget is always balanced. The results make a strong case for the adoption of the latter in other commodity exporting economies.

Suggested Citation

  • 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.
  • Handle: RePEc:ila:ilades:inv183
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    1. Jorge E. Restrepo & Hernán Rincón, 2006. "Identifying Fiscal Policy Shocks In Chile And Colombia," Borradores de Economia 397, Banco de la Republica de Colombia.
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    3. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
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    Cited by:

    1. 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.
    2. Luis Felipe Céspedes & Jorge A. Fornero & Jordi Galí, 2013. "Non-Ricardian Aspects of Fiscal Policy in Chile," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 8, pages 283-322 Central Bank of Chile.
    3. García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    4. Carlos J. García & Pablo González M. & Antonio Moncado S., 2013. "Macroeconomic Forecasting in Chile: a Structural Bayesian Approach," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(1), pages 24-63, April.
    5. Jair N. OJeda & Julián A. Parra Polanía & Carmiña O. Vargas, 2014. "Natural-Resource Booms, Fiscal Rules and Welfare in a Small Open Economy," Borradores de Economia 807, Banco de la Republica de Colombia.
    6. Michael Kumhof & Douglas Laxton, 2010. "Chile’s Structural Fiscal Surplus Rule: a Model-Based Evaluation," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(3), pages 5-32, December.

    More about this item

    Keywords

    open economy; fiscal policy; rule of thumb consumers; government spending.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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