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Fiscal Consolidations in Commodity-Exporting Countries: A DSGE Perspective

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Listed:
  • Manuel González-Astudillo
  • Juan Guerra-Salas
  • Avi Lipton

Abstract

We build a small open economy DSGE model to evaluate the macroeconomic e?ects of ?scal consolidations in commodity-exporting countries. The ?scal block includes productive public capital, utility-augmenting government consumption, transfers to hand-to-mouth households, and taxes on labor and capital income as well as consumption. A country risk premium that depends on the level of foreign debt is crucial for the transmission of ?scal policy. This premium in?uences consumption and saving decisions of the ?nancially unconstrained households, and the rest of the economy through general-equilibrium e?ects. We estimate the model with Bayesian methods using data from Ecuador, an economy with a high dependence on oil exports. We then study the macroeconomic e?ects of di?erent tax and expenditure instruments. We consider a full consolidation program following the agreement between Ecuador and the IMF for the 2020-2025 period. The program reduces the country premium, which promotes private investment. Consumption of ?nancially unconstrained households is adversely a?ected by higher labor income taxes, but consumption of hand-to-mouth households increases due to the expansion of government transfers under the program. In aggregate terms, GDP declines by about 1% relative to trend.

Suggested Citation

  • Manuel González-Astudillo & Juan Guerra-Salas & Avi Lipton, 2024. "Fiscal Consolidations in Commodity-Exporting Countries: A DSGE Perspective," Working Papers Central Bank of Chile 1015, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:1015
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    References listed on IDEAS

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