Structural Fiscal Rules and The Business Cycle

Carlos Montoro and Moreno Eduardo ()
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Moreno Eduardo: Banco Central de Reserva del Perú

No 2007-011, Working Papers from Banco Central de Reserva del Perú

Abstract: In this paper we extend the neoclassical model presented by Baxter and King (1993) to evaluate the effects of two alternative fiscal policy rules on the business cycle. The rules we analyze are similar to those implemented in practice by some countries, such as: limits to the structural fiscal deficit (which eliminates the effects of the business cycle on the government revenues) and limits to conventional fiscal deficit. We focus our analysis in a model calibrated to mimic Peruvian data to evaluate the short run dynamics and the conditions for the stability of the equilibrium. We find that the rule based on the structural balance generates a counter cyclical fiscal policy, which reduces significantly output volatility. Moreover, we find that a condition for a determinate equilibrium in the model endowed with the structural rule is that non-financial government expenditures react more than one–to-one to changes in interest expenditures.

Keywords: Reglas Fiscales; Política fiscal; Volatilidad del Producto (search for similar items in EconPapers)
JEL-codes: E62 H30 H60 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2007-011

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