Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario

From Macroeconomic Stability to Welfare: Optimizing Fiscal Rules in Commodity-Dependent Economies

“…Within the existing literature that examines the optimized single parameter fiscal response to public revenue, a consistent finding emerges: Ricardian consumers tend to favor a less interventionist policy approach, aiming to maximize their welfare under a BBR (García-Cicco and Kawamura, 2015, Garcia et al, 2011, and Ojeda-Joya et al, 2016. In contrast, as our findings also indicate, non-Ricardian households exhibit a preference for a SBR or CCR stance, allowing the government to smooth consumption on their behalf.…”

“…Our study aligns with two distinct strands of this literature. The first strand centers on analyzing the single optimized fiscal response to revenue fluctuations (García-Cicco and Kawamura, 2015, Garcia et al, 2011, and Ojeda-Joya et al, 2016, while the second strand delves into the examination of welfare-maximizing fiscal rules that respond differently to the tax revenue and commodity revenue gaps (Kumhof andLaxton, 2013, andSnudden, 2016). Unlike the previously mentioned papers, we significantly improve the quantitative fit of the model by introducing a feasibility/sustainability constraint to the fiscal rule and estimating model parameters, including those related to the fiscal rule, using Bayesian methods.…”

Does the design of a fiscal rule matter for welfare?

“…Kumhof and Laxton (2013) and Snudden (2016) find that a counter-cyclical rule can increase welfare by more than a balanced budget rule, but may do so only at the cost of greater instrument (tax rate) volatility. According to Vogel et al (2013) and Ojeda-Joya et al (2016), the potential welfare gains from a fiscal rule are large, but only if households are liquidityconstrained. Although they use a very different methodology than we employ, Mayer and Stähler (2013) observe welfare gains from switching to a Swiss-style "debt brake" rule from a balanced budget rule, a result that is consistent with our findings.…”

Optimal fiscal management in an economy with resource revenue‐financed government‐linked companies

“…Following Ojeda‐Joya et al (2016) and Hristov and Hülsewig (2017), we give relatively large prior variance to structural parameters so that the kurtosis of posterior distributions is not heavily influenced by prior means: the data can therefore ‘speak for themselves’. For the shock persistence and standard deviation parameters, our choices of prior means are consistent with the existing Bayesian DSGE literature [for instance, Christiano, Eichenbaum, & Evans, 2005, Geweke, 1999, 2005, Smets & Wouters, 2003, 2007; Smets & Villa, 2016], as well as notable emerging countries' business‐cycle studies such as García‐Cicco, Pancrazi, and Uribe (2010).…”

“…3,4 We analysed numerically for an optimal combination of allocation to the external Resource Fund and the facilitation of fund-raising activities of the SWF in the context of the minimization of a social loss function, à la Agénor (2016). Given these, our study is closest to Agénor (2016), García-Cicco andKawamura (2015), Ojeda-Joya, Parra-Polanía, and Vargas (2016). Our stability criterion is similar to the former, but the actual data-based business-cycle evaluations used to guide the optimality analysis is closer to the latter two, which are calibrated to Chile and Colombia respectively.…”