Chile's Structural Fiscal Surplus Rule

The paper analyzes Chile''s structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF''s Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile''s current fiscal rule performs well if the policymaker puts a small weight on output volatility (relative to inflation volatility) in his/her objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile''s adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in GDP.Current account surpluses;Copper;Economic models;fiscal policy, tax revenue, labor income, budget constraint, fiscal accounts, fiscal instruments, tax rates, fiscal rule, marginal propensity to consume, the marginal propensity to consume, government spending, structural fiscal, investment spending, capital income, fiscal surplus, aggregate consumption, taxation, consumption goods, fiscal responsibility, real interest rate, consumption tax, fiscal responsibility law, consumption spending, current consumption, government budget constraint, budget constraints, government budget, capital accumulation, aggregate demand, fiscal rules, consumption tax revenue, fiscal policy rules, fiscal balance, consumption taxes, fiscal variables, fiscal policies, fiscal revenue, fiscal model, tax base, fiscal instrument, fiscal policy rule, substitution effect, budget deficits, fiscal surpluses, tax reductions, fiscal stimulus, aggregate income, current income, expansionary fiscal, public investment spending, household wealth, reduction in consumption, fiscal authorities, fiscal deficits, general equilibrium, household budget, fiscal shocks, tax systems, tax revenues, fiscal side, annual expenditures, income effect, consumption demand, investment demand, future consumption, account deficits, tax income, government expenditures, taxes on labor, tax payments, marginal utility of consumption, current investment, fiscal consolidation