Stabilizing Role of Fiscal Policy
Roberto Rigobon
Comments: Alejandro Micco
Nominal Exchange rate reaction
Stabilization Tools
`
150
Exchange Rate Policy
`
Argentina
140
NER rate movement
Brasil
Chile
130
Colombia
México
120
110
100
90
80
Ene-08
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`
Monetary Policy
Fiscal Policy.
Credit Policy
Jul-08
Oct-08
Ene-09
Abr-09
Fiscal and Monetary Policy Stimuli
1000
Reduction in monetary policy rate (bps)
`
Abr-08
Turkey
900
Chile
800
700
600
Peru UK
Brazil
500
SA
Mexico
400
Italy
France
USA
Germany
300
Arabia
Korea
Indonesia
India
200
Russia
Australia
Canada
Saudi
100
Japan
0
0
1
2
3
Fiscal stimulus (% of GDP)
4
5
Liquidity (MP) did not arrive to Firms and
households.
Lending to the private sector.
Empresas
May-09
Mar-09
Ene09*
Banco estado
Nov-08
Sep-08
135
130
125
120
115
110
105
100
Jul-08
Sistema
May-08
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Private Bank
State-owned Band
Mar-08
`
Ene-08
`
Capital Inflows Stabilization Tools
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Fiscal Policy
`
`
Fiscal rule reduce capital inflows.
but does it have the size and the elasticity required to offset
capital inflows?
`
`
Capital Control.
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Distortions / loophole
`
`
Elasticity in Chile is low.
In mainly in the medium run?
Exchange rate uncertainty?
Fiscal Policy and business Cycle
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In the last crisis, not before, FPs were countercyclical.
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Structural Change? Luck because we were in a commodity
boom?
It is difficult to implement
Fiscal revenues are volatile
Commodity dependence.
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Chile: Fiscal Revenues.
Impact on FP
Transacciones Financieras
Total Ingresos
28,527
0.1%
23,510,904
100%
4,570,499
19%
Total Mining
CC FP and REER vol
`
`
`
Financial system
High i
Inefficient specialization
9,000,000
350
8,000,000
300
7,000,000
250
Ingresos Cobre
`
6,000,000
5,000,000
200
4,000,000
150
3,000,000
100
2,000,000
50
1,000,000
0
0
1994
1995
1996
1997
1998
CODELCO
1999
2000
2001
Tributación Mineras
2002
2003
2004
Precio Cobre
2005
2006
2007
2008
2009
Preciodel cobre (US c por libra)
`
Ingresos Presupuesto 2010
MM$
MM$
Ingresos tributarios netos 17,524,887
75%
Minería Privada
1,608,556
9%
Otros
15,916,332
91%
Cobre Bruto
2,961,943
13%
Previsionales
1,452,835
6%
Rentas Propiedad
425,679
2%
Otros
1,117,033
5%
Solutions
`
Insure the risk
`
Transfer the risk to foreigners.
`
`
Privatization. Very popular!!!
Royalty.
`
Derivative
`
`
`
`
Political pressure to increase revenues during good times: Increasing
Royalty.
Extremely expensive.
High political Risk: Oil and Copper in Chile
Contingent debt
Stabilization Fund / Fiscal Rule
Fiscal rule and Stabilization Fund
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Stabilization Fund is different from a Fiscal Rule.
`
`
`
Include different source of risk
Wealth funds should be the result of a Fiscal Rule.
Fiscal rule:
`
`
`
Ensure fiscal funds for bad time
Define a long term fiscal policy. Credibility.
Structural balance and/or deficit.
`
Permanent income
Discretion.
Both have similar political problems
Ministry of Finance (Andrés Velasco):
Public Evaluation
`
Bachelet alaba a Velasco en EE.UU.: Pasó de ser
catalogado como "mano de guagua" a un "héroe
nacional"
Fiscal rule and Stabilization Fund
`
Stabilization Fund is different from a Fiscal Rule.
`
`
`
Include different source of risk
Wealth funds should be the result of a Fiscal Rule.
Fiscal rule:
`
`
`
Ensure fiscal funds for bad time
Define a long term fiscal policy. Credibility.
Structural balance and/or deficit.
`
`
Permanent income
Discretion.
Both have similar political problems
Although Fiscal Rule help the political process
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`
`
Define how much you can spend in a given year: Budget discussion.
The public opinion need to understand.
Discussion becomes how you divide the cake.
Institution
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Institutional Arrangement
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Investment policy
definition
Reduce the probability to
change the FR.
Reduce the political
problem to define
expectation about future
income.
Reduce the political cost
to have a risky strategy.
Externalize the political
cost to have a negative
returns.
Investment Policy
Ministry of Finance
Investment guidelines
Execution
Central Bank
Financial
Committee
But you cannot construct institution in one
day.