External shocks, fiscal stabilization and political constraints

This dissertation explores the links between Institutional Arrangements and Fiscal Performance in Latin America and based on this links, it proposes an Oil Stabilization Fund for the Venezuelan Government. Four measures of fiscal performance, namely, the level of government expenditures, the size of budget deficits and public debt, and the response of fiscal policy to business fluctuations, and two institutional dimensions, namely, electoral systems and budgetary process are considered. I find evidence that electoral systems characterized by a large degree of proportionality, i.e., a large district magnitude, and by large degree of political fragmentation, tend to have larger governments, larger deficits and a more procyclical response to the business cycle. I also find that more transparent and hierarchical budgetary procedures lead to lower deficits and debt. Contrary to the findings of Hallerberg and von Hagen for European countries, we find no evidence that centralized budgetary arrangements neutralize the potentially adverse impact on fiscal deficits of a larger degree of proportionality of the electoral system. Given the importance of the budgetary institutions and the distortions introduced by the “commons-pool problem”, this dissertation concerned with optimal saving/spending rules for a commodity-exporting countries, which face some constraints in their ability to borrow. I find that for an impatient government in a stationary environment, assets are expensive to hold, but can provide a useful tool for stability between government expenditures and income. Such buffers are more effective and less costly the less positively autocorrelated is the income stream. Savings will be procyclical in the usual way. In a non-stationary environment, income smoothing is weak, and either there is almost no saving or even saving could be contracyclical, with adverse effects on income stabilization. In this case, it is necessary to introduce adjustment cost in the utility function in order to find an optimal saving/spending rule. The dissertation conclude that, even for low risk aversion parameters the much higher volatility encountered in the Venezuelan oil income processes compared to developed countries justifies high levels of precautionary savings. The Oil Stabilization Fund proposed here decrease the volatility of the fiscal expenditures in more than 40 percent