Macroeconomics of public sector deficits : the case of Chile

Abstract

The authors analyze the structure of public deficits in Chile, distinguishing between consolidated nonfinancial public deficits and quasifiscal losses of the Central Bank - focusing on the determinants and sustainability of the deficits. In the framework of an estimated portfolio model, they simulate the path of domestic inflation and interest rates for money-financed and debt-financed deficits. Then they trace the effects of deficits, and their form of financing, on private consumption and investment - focusing on empirical estimates of the different channels through which public spending and taxation crowd in or crowd out private spending. Finally, they measure the spillover effects from the deficit to the real exchange rate and the trade surplus. Chile's successful experience suggests that fiscal stabilization is a prerequisite for structural reform - and that structural reform need not be postponed until stabilization is fully achieved.Economic Stabilization,Economic Theory&Research,Public Sector Economics&Finance,Environmental Economics&Policies,Macroeconomic Management