The Case for a Countercyclical Rule-based Fiscal Regime

Abstract

We build a general equilibrium model of a small open economy, with the purpose of analyzing the effects of a countercyclical rule-based fiscal regime, which corresponds to a stylized version of the structural balance in place in Chile. The economy exports a domestically-produced good and one natural resource (commodity), which is partly state-owned, generating income to the government. We analyze how shocks are transmitted to the economy in the presence of this fiscal rule by introducing shocks to government spending, taxes, and the price of the natural resource. In the last shock, we compare our structural rule with a case where the budget is always balanced. The results make a strong case for the adoption of the latter in other commodity exporting economies.open economy, fiscal policy, rule of thumb consumers, government spending.