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Fiscal Rules for Commodity Exporters:Prudence and Procyclicality

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Abstract

This paper compares welfare levels under alternative fiscal rules for small open, commodity exporter, economies whose fiscal income varies with the world commodity price (in a dynamic, stochastic, and general equilibrium setting). Between the extremes of a procyclical balanced budget policy and an acyclical spending rule, there is a continuum of rules. Thus, the best degree of spending stabilization is found. The acylical rule benefits households that do not enjoy access to capital markets by providing a financial cushion that they themselves cannot provide, boosting their mean consumption. However, households that enjoy full access to capital markets suffer under this rule, since the government reduces their role in smoothing consumption and accumulating assets.

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  • Carlos Garcia & Jorge Restrepo & Evan Tanner, 2009. "Fiscal Rules for Commodity Exporters:Prudence and Procyclicality," ILADES-UAH Working Papers inv227, Universidad Alberto Hurtado/School of Economics and Business.
    • Handle: RePEc:ila:ilades:inv227
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
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    More about this item

    Keywords

    Fiscal rules; welfare; small open economy; rule-of-thumb consumers;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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