Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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