A Lesson From the South for Fiscal Policy in the US and Other Advanced Countries
CitationFrankel, Jeffrey A. 2011. A Lesson From the South for Fiscal Policy in the US and Other Advanced Countries. HKS Faculty Research Working Paper Series RWP11-014, John F. Kennedy School of Government, Harvard University
AbstractAmerican 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.
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