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Faculty Research Working Paper Series
Jeffrey A. Frankel
James W. Harpel Professor of Capital Formation and Growth
phone: (617)496-3834
fax: (617)496-5747
A Lesson From the South for Fiscal Policy in the US and Other Advanced Countries
Frankel, Jeffrey A. "A Lesson From the South for Fiscal Policy in the US and Other Advanced Countries." HKS Faculty Research Working Paper Series RWP11-014, February 2011.
Abstract
American 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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