A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries
Jeffrey A. Frankel
Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)
February 2, 2011
HKS Working Paper No. RWP11-014
American fiscal policy has been procyclical: Washington wasted the expansion period 2001-2007 by running budget deficits, but by 2011 had come to feel constrained by inherited debt to withdraw fiscal stimulus. Chile has achieved countercyclical fiscal policy – saving in booms and easing in recession – during the same decade that rich countries forgot how to do so. Chile has a rule that targets a structural budget balance. But rules are not credible by themselves. In Europe and the U.S., official forecasts are overly optimistic in booms; so revenue is spent rather than saved. Chile avoids such wishful thinking by having independent panels of experts decide what is structural and what is cyclical.
Number of Pages in PDF File: 37
Keywords: budget rules, copper, Chile, commodity boom, countercyclical, fiscal, forecast, structural budget, institutions, procyclical, Stability and Growth Pact, United States
JEL Classification: E62, F41, H50, O54working papers series
Date posted: June 11, 2011
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