Revista Economía Chilena

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Portada Revista Economía Chilena

Volume 14 Nº 2 August 2011

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Floats, Pegs and the Transmission of Fiscal Policy
Giancarlo Corsetti / Keith Kuester / Gernot J. Müller

According to conventional wisdom, fiscal policy is more effective under a fixed exchange rate regime than under a flexible one. In this paper we reconsider the transmission of shocks to government spending across these regimes within a standard new-Keynesian model of a small open economy. Because of the stronger emphasis on intertemporal optimization, the new-Keynesian framework requires a precise specification of fiscal and monetary policies, and their interaction, at both short and long horizons. We derive an analytical characterization of the transmission mechanism of expansionary spending policies under a peg, showing that the long-term real interest rate necessarily rises if inflation rises on impact, in response to an increase in government spending. This drives down private demand even though short-term real rates fall. As this need not be the case under floating exchange rates, the conventional wisdom needs to be qualified. Under plausible medium-term fiscal policies, government spending is not necessarily less expansionary in a floating regime.
A Solution to Fiscal Procyclicality: the Structural Budget Institutions Pioneered by Chile
Jeffrey Frankel

This paper assesses official government forecasts of the future performance of the economy and public accounts of a large sample of countries. The main finding is that official GDP and budget forecasts tend to be—on average—overoptimistic, and that the bias is larger at longer horizons and during economic booms. The conclusion is that official forecasts, if not shielded from political pressures, tend to embellish predictions, and the problem is magnified if the government is formally subject to a budget rule. The essential innovation that has permitted Chile to implement a countercyclical fiscal policy and generate surpluses during booms is not just the structural rule per se, but the regime that entrusts an independent panel of experts the responsibility of estimating how far current copper prices and GDP have diverted from their long-time averages.
Non-Ricardian Aspects of Fiscal Policy in Chile
Luis Felipe Céspedes C. / Jorge A. Fornero / Jordi Galí

This paper examines non-Ricardian effects of government spending shocks in the Chilean economy. We first provide evidence on those effects based on vector autoregressions. We then show that such evidence can be accounted for by a model that features: (i) a sizeable share of non-Ricardian households (i.e. households which do not make use of financial markets and just consume their current labor income); (ii) nominal price and wage rigidities; (iii) an inflation targeting scheme and (iv) a structural balance fiscal rule that reflects the particular Chilean fiscal rule. The model is estimated employing Bayesian techniques. Finally, we use model simulations to demonstrate the countercyclical effects of the Chilean fiscal rule as compared with a zero-deficit rule.
Research Notes
Un Modelo de Factores Dinámicos de Pequeña Escala para el Imacec
Gonzalo Echavarría M. / Wildo González P
Dinámica de la Tasa de Incumplimiento de Créditos de Consumo en Cuotas
Rodrigo Alfaro A. / David Pacheco L. / Andrés Sagner T
Books review
Monetary Policy under Financial Turbulence de Luis Felipe Céspedes, Roberto Chang y Diego Saravia (editores)
Pablo E. Guidotti
Publications Review
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