Download Chile`s Recent Experience

Macroeconomic Policy and
Economic Performance: Chile’s
Recent Experience
Luis F. Céspedes
Ministry of Finance-Chile
Macroeconomic Policy and Stabilization
• External shocks, such as terms of trade and world interest rate
shocks are key driving forces behind business cycle in emerging
market economies.
• Economic stabilization depends crucially on the macroeconomic
framework: monetary policy, fiscal policy and exchange rate
regime.
• Reaction to shocks: countercyclical or pro-cyclical?
– Maintain (reduce) interest rates and allow depreciation?
– Raise interest rates to avoid depreciation and inflation?
– Expansionary fiscal policy?
Cost and Duration Recessions: Selected Experiences
Chile 82
Chile 99
Mexico 95
Korea 98
Indonesia 98
Colombia 99
Ecuador 99
Latin America 81-82
Average Sample
GDP
Accumulated
Losses
Duration
Initial fall in
GDP
34,5%
10,7%
10,7%
11,1%
22,6%
9,9%
9,6%
24,6%
13,6%
7,0
6,0
3,0
2,0
6,0
5,0
3,0
6,6
4,6
-13,6%
-0,8%
-6,2%
-6,7%
-13,1%
-4,2%
-6,3%
-4,2%
-2,1%
Latin America 81-82: Brazil, Bolivia, Costa Rica, Ecuador, Uruguay.
Chile: Policy Framework
• Flexible Inflation Targeting
– Inflation target band: 2-4%.
– Medium run horizon.
• Free-floating exchange rate regime.
– Foreign exchange interventions under special circumstances.
• Fiscal Rule
– Structural fiscal balance
Chile: Policy Framework
• Recent evidence indicates that macroeconomic volatility has
been significantly reduced in recent years.
• The implementation of a flexible and credible inflation targeting
regime has allowed monetary policy to play a key stabilizing
role.
• Fiscal Policy has also been key to reduce the effects of external
shocks in activity and in the competitiveness of the economy.
GDP volatility has decreased in recent
years
15%
12%
9%
6%
1980-1989
1990-1996
1997-2002
2003-2007
3%
Volatilidad
Sources: Ministry of Finance and Central Bank of Chile.
20
00
20
02
20
04
20
06
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
0%
Central Bank has been able to implement a
countercyclical monetary policy
7
6
5
4
3
2
1
800
750
700
650
600
550
500
Dic-01
Jun-02
Dic-02
Interest Rate
Sources: Ministry of Finance and Central Bank of Chile.
Jun-03
Dic-03
Exchange Rate
Fiscal Policy
• A credible fiscal policy is crucial to isolate government
expenditure from economic fluctuations.
• During booms, higher fiscal savings reduce pressures on
aggregate demand which stabilizes economic activity and the
real exchange rate.
• Evidence indicate that in many developing economies, fiscal
policy is pro-cyclical. Moreover, it is common that fiscal
expenditure increases in a higher proportion than fiscal revenues
during good times.
Fiscal Policy in Chile
• Government expenditures are determined by medium and long
term fiscal revenues (structural revenues).
• Structural revenues are a function of potential output and the
“reference” price of copper.
• During recessions the government borrows and during
expansions it saves.
Fiscal Policy in Chile
Fiscal Surplus
4,7%
5%
4%
3%
2,2%
2%
1%
0%
-0,5%
-0,5%
-1%
-1,2%
-2%
2001
2002
2003
2004
2005
External conditions have been favorable
for the Chilean economy in recent years.
400
350
300
250
200
150
100
50
Fuente: Cochilco
Fiscal Policy in Chile
Fiscal Surplus
2,0%
1,0%
0,0%
-1,0%
-2,0%
-3,0%
-4,0%
t-1
t
Chile 1982
Chile 1999
t+1
Chile 2001
Fiscal Policy in Chile
Government Expenditure
7,5%
5,0%
2,5%
0,0%
-2,5%
-5,0%
t-1
t
Chile 1982
Chile 1999
t+1
Chile 2001
By increasing fiscal saving during good times,
fiscal policy has reduced the appreciation of the
RER
Cycle 1994-1997
Cycle 1998-2003
Cycle 2004-2006
Average Price
of Copper
% RER
111,3
75,3
173,9
-8,4%
18,7%
-1,8%
Sources: Ministry of Finance and Central Bank of Chile.
Real Exchange Rate
115
115
110
110
105
105
100
100
95
95
90
90
85
85
80
80
75
75
Jun-86
Jun-90
Jun-94
Jun-98
Average 1990-2006 RER
Fuente: Banco Central.
Jun-02
RER
Jun-06
Gross Debt Public Sector
(% of GDP)
70%
60%
50%
40%
30%
20%
Source: Ministry of Finance
2005
2004
2003
2002
2000
1999
1998
2001
Gross Debt Central Bank
2006 (p)
Gross Debt Central Government
1997
1996
1995
1994
1993
1992
1991
0%
1990
10%
Portfolio management has also being consistent
with keeping “competitiveness” of the economy
Financial Assets of the Treasury
100%
90%
28,7%
80%
Pesos
18,4%
70%
60%
50%
81,6%
40%
71,3%
30%
20%
Foreign
Currency
10%
0%
April 2006
June 2006
The Fiscal Responsibility Law
• Complements the Structural Balance Rule by focusing on the
management of the financial assets generated by the
implementation of the rule.
• Includes the creation of two funds: the pension reserve fund and
the economic and social stabilization fund.
• Improves transparency of fiscal policy and financial asset
management.
• Empowers the Government to capitalize the Central Bank.
PENSION RESERVE FUND
• 0.2% of GDP minimum
• 0.5% of GDP maximum
CAPITALIZATION OF THE
CENTRAL BANK
FISCAL
SURPLUS
• 0.5% of GDP for 5 years
ECONOMIC AND SOCIAL
STABILIZATION FUND
• Accumulates all of the surplus that
exceeds 1%of GDP