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Chile’s Structural Fiscal Surplus Rule; A Model-Based Evaluation

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  • Michael Kumhof
  • Douglas Laxton

Abstract

The paper analyzes Chile's structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF's Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile's current fiscal rule performs well if the policymaker puts a 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-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile's adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is 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 GDP.

Suggested Citation

  • Michael Kumhof & Douglas Laxton, 2009. "Chile’s Structural Fiscal Surplus Rule; A Model-Based Evaluation," IMF Working Papers 09/88, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/88
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    References listed on IDEAS

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    Cited by:

    1. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Jorge Fornero & Markus Kirchner & Andrés Yany, 2015. "Terms of Trade Shocks and Investment in Commodity-Exporting Economies," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Caputo & Roberto Chang (ed.), Commodity Prices and Macroeconomic Policy, edition 1, volume 22, chapter 5, pages 135-193 Central Bank of Chile.
    3. World Bank, 2010. "Ecuador : Diversification and Sustainable Growth in an Oil - Dependent Country," World Bank Other Operational Studies 18503, The World Bank.
    4. 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.
    5. 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.
    6. International Monetary Fund, 2010. "Belgium; 2009 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion," IMF Staff Country Reports 10/63, International Monetary Fund.
    7. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(3), pages 163-193, December.
    8. 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.
    9. Eric M. Leeper, 2009. "Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle," NBER Working Papers 15514, National Bureau of Economic Research, Inc.
    10. Medina, Juan Pablo & Soto, Claudio, 2016. "Commodity prices and fiscal policy in a commodity exporting economy," Economic Modelling, Elsevier, vol. 59(C), pages 335-351.
    11. 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.
    12. Jens R Clausen, 2008. "Calculating Sustainable Non-mineral Balances as Benchmarks for Fiscal Policy; The Case of Botswana," IMF Working Papers 08/117, International Monetary Fund.
    13. Vladimir Klyuev & Stephen Snudden, 2011. "The Effects of Fiscal Consolidation in the Czech Republic," EcoMod2011 2974, EcoMod.
    14. Juan Guerra-Salas, 2016. "Fiscal Policy, Sectoral Allocation, and the Skill Premium: Explaining the Decline in Latin America’s Income Inequality," Working Papers Central Bank of Chile 779, Central Bank of Chile.

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    Keywords

    Economic models; Chile; Copper; Current account surpluses; Business cycles; Fiscal policy; Structural Fiscal Surplus Rule; tax revenue; labor income; budget constraint; fiscal accounts;

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