A Lesson From the South for Fiscal Policy in the United States and Other Advanced Countries

Abstract:

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 United States, 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.

Publisher's Version

Last updated on 08/12/2014