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Chile's Structural Fiscal Surplus Rule: A Model-Based Evaluation

Author/Editor: Kumhof, Michael | Laxton, Douglas
Authorized for Distribution: April 1, 2009
Electronic Access: Free Full Text (PDF file size is 702KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 09/88
Subject(s): Fiscal policy | Chile | Current account surpluses | Business cycles | Copper | Economic models
Author's keyword(s): Structural fiscal surplus rule
 
English  
    Published:   April 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009088   Pages:   54
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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