A Solution To Fiscal Procyclicality: The Structural Budget Institutions Pioneered By Chile
Historically, many countries have suffered a pattern of procyclical fiscal policy: spending too much in booms and then forced to cut back in recessions, thereby exacerbating the business cycle. This problem has especially plagued Latin American commodity-producers. Since 2000, fiscal policy in Chile has been governed by a structural budget rule that has succeeded in implementing countercyclical fiscal policy. The key innovation is that the two most important estimates of the structural versus cyclical components of the budget - trend output and the 10-year price of copper - are made by expert panels and thus insulated from the political process. Chile's fiscal institutions could usefully be emulated everywhere, but especially in other commodity-exporting countries.