La Política Fiscal y el Ciclo Económico en el Chile de los Noventa

Carlos Budnevich and Guillermo Le Fort Varela

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: The Chilean economy is historically characterized by an important degree of volatility. Volatility is undesirable in an indexed economy that attempts do disinflate, making the smoothing of the business cycle an issue for economic policy. The article studies the effect of public expenditure stabilization and the use of taxes as an counter cyclical tool. This is done calibrating a basic macroeconomic model to Chilean reality. The results show that about 25% of variability in growth rates could be eliminated in the model if cyclical fiscal impulses where avoided. This could be achieved with constant rates of growth for public consumption and investment, and through counter cyclical taxes. Finally, the article proposes the idea of establishing a stabilization mechanism for public expenditure through growth limits and state dependent flexibility rules. The establishment of a stabilization fund for tax revenues where counter cyclical responses by the fiscal sector could be accounted for and accumulated, is important for expenditure growth stabilization to be effective and credible. This measure could grant public expenditure independence from changes in tax collecting along the business cycle. Moreover, the possibility of flexibilizing the VAT is analyzed, assessing its effectiveness, its time consistency problems, and the costs and benefits of substituting it with some degree of flexibility on income taxes or on investment tax incentives. The article concludes that there exists a series of fiscal instruments that could be used in a counter cyclical way, like expenditure growth rules, stabilization funds and flexible tax systems.

Date: 1997-10
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:20

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