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A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile. Jeffrey Frankel Harvard University Fiscal Policy and Macroeconomic Performance Fourteenth Annual Conference of the Central Bank of Chile October 21-22, 2010, Santiago.
Fiscal Policy and Macroeconomic Performance
Fourteenth Annual Conference of the Central Bank of Chile
October 21-22, 2010, Santiago
Ratings for “Emerging Economies”
Kaminsky, Reinhart & Vegh (2004)
Figure 8c: Budget Forecasts are more Biased(4) in Booms & (5) at Longer Horizons
more if GDP is currentlyhigh & especially at longerhorizons
Budget balance forecast error as % of GDP, Full dataset
Variable is lagged so that it lines up with the year in which the forecast was made.*** p<0.01, ** p<0.05, * p<0.1 Robust standard errors in parentheses, clustered by country.
(6)Official budget forecasts are more optimistically biasedin countries subject to a budget deficit rule (SGP)Budget balance forecast error as a % of GDP, Full Dataset
*** p<0.01, ** p<0.05, * p<0.1 Robust standard errors in parentheses, clustered by country.
Table 4: Uncertainty Is Greater When the Copper Price is Above its Long-run TrendRegression of option-implied copper price volatility on log (real spot price) – linear trend(log real spot price, using data for 230 years)
*** p<0.01, ** p<0.05 Robust standard errors in parentheses
(10) Forecasts do internalize the tendency for copper prices to revert toward long-run equilibriumFigure 4: Copper prices spot, forward, & forecast2001-2010
*** p<0.01 Robust standard errors in parentheses
LHS [ln(real forward price)-ln(real spot price)]*100 Real price ≡ nominal price divided by US CPI.
15-month forward is Jan.1989 – July 2010. 27-month is July 1993- July 2010. 63-month is Oct.2002.Data source: LME via Bloomberg for copper prices. IMF IFS for US CPI.
2002-09: Did not allow spreads to open up between sovereign debt of Greece & Germany.
Winter 2010: Did not tell Greece to go to the IMF. Preferred instead to “handle it internally.”
Still today: No “Plan B” to restructure Greek debt (and save the bailout fund for more deserving banks & PIIGs).
Council on Foreign Relations
Greece will have re-structure its debt.
The euro-zone will not break up.
There is no legal provision for members to leave.
The last decade has seen a historic reversal in roles between advanced countries and emerging/developing countries regarding fiscal policy.
The US public discussion is framed like a battle between conservatives who philosophically believe in strong budgets & small government, and liberals who do not. Not the right way to characterize the debate. 
 Forget that small government is classically supposed to be the aim of “liberals,” in the 19th century definition, not “conservatives.” My point is different: those who call themselves conservatives in practice tend to adopt policies that are the opposite of fiscal conservatism. I call them “illiberal.” “Republican & Democratic Presidents Have Switched Economic Policies”Milken Inst.Rev.2003.
(ii) Spending & deficts both rose sharply when Presidents Reagan, Bush I, & Bush II took office.Vs. the 1990s: The Shared Sacrifice approach succeeded in eliminating budget deficits, importantly by slowing spending.
versus party vote ratio in preceding election
Republican states take home significantly more federal $ (relative to taxes paid)than Democratic states
big inflow of US $
low inflow of US $