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

Michael Kumhof and Douglas Laxton

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: 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.

Date: 2010-12
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (9)

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Journal Article: Chile’s Structural Fiscal Surplus Rule: a Model-Based Evaluation (2010)
Working Paper: Chile’s Structural Fiscal Surplus Rule: A Model-Based Evaluation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:602

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