Fiscal Rule and Public Investment in Chile

Rodrigo Fuentes, Raimundo Soto and Klaus Schmidt-Hebbel

No 543, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: We use three different approaches --narrative approach, counterfactual synthetic control method, and DSGE model--to assess the design and operation of the Chilean fiscal rule and its impact on public investment. We acknowledge the substantial progress in building a modern institutional framework for fiscal policy made during the past 30 years. Nevertheless, we find that the rule is incomplete in at least two dimensions: it lacks an escape clause and it needs supplementing the budget balance rule with a debt rule. The former was made patent with the breaching of the rule in 2009 and the subsequent inability of the authorities to steer fiscal accounts back to its long-term sustainable path. The latter showed in the speedy built up of the public debt in the last decade as a result of the need to finance fiscal deficits. We propose a number of reforms to existing fiscal institutions, including improving on the transparency and accountability of the institutional framework, a reformulation of the rule to consider a multi-year horizon planning of public finance (including investment plans, balance sheet management), escape clauses, and a debt anchor among others. This will complement the actual fiscal framework, especially nowadays when the fiscal stance has deteriorated significantly and is expected to worsen as a result of the Coronavirus pandemics.

Date: 2020
New Economics Papers: this item is included in nep-dge, nep-lam and nep-mac
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.economia.uc.cl/docs/doctra/dt-543-2.pdf (application/pdf)

Related works:
Working Paper: Fiscal Rule and Public Investment in Chile (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:543

Access Statistics for this paper

More papers in Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile. Contact information at EDIRC.
Bibliographic data for series maintained by Jaime Casassus ().