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Fiscal Policy for Commodity Exporting Countries: Chile's Experience

  • Klaus Schmidt-Hebbel

Fiscal policy regimes based on a developed fiscal institutions and fiscal rules are increasingly adopted by governments that aim at stronger fiscal policy sustainability, more output stability, and more resilience of public finances to political pressure. This paper describes and evaluates fiscal policy institutions and particularly the fiscal rule in Chile. This commodity-exporting country is unique by having in place since 2001 a cyclically-adjusted government balance rule that takes account of both GDP shocks and mineral export price shocks. The paper starts by assessing the overall institutional set-up for fiscal policy in Chile in international comparison. Then it focuses on the fiscal rule, its changes over time, and its budgetary consequences and macroeconomic effects. By and large, the rule is found to have contributed to fiscal sustainability and credibility, and to macroeconomic stability. Yet the rule also presents shortcomings in its institutional set-up and application to the budget. Therefore the paper presents proposals for reform, following the recommendations made by the Advisory Council for the Design of Fiscal Policy in early 2011. The final section of the paper draws policy lessons from international experience and the Chilean case on institutional reform of fiscal policy and adoption of fiscal rules in commodity-exporting countries.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 415.

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Date of creation: 2012
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Handle: RePEc:ioe:doctra:415
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