The Case for a Countercyclical Rule-based Fiscal Regime

Carlos García and Jorge Restrepo ()
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Jorge Restrepo: Banco Central de Chile, http://www.bcentral.cl

ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business

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.

Keywords: open economy; fiscal policy; rule of thumb consumers; government spending. (search for similar items in EconPapers)
JEL-codes: E32 E62 H41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-07
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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