On The Welfare and Distributional Effects of Implementing an Expenditure Fiscal Rule
Luis Corrales L.
Tesis, Magíster en Economía, IE-PUC, 2017
Abstract: The aim of this paper is to study the welfare and distributional effects of implementing an expenditure fiscal rule in a developing country. Particularly, I want to measure these effects in a transitional dynamics environment, triggered by a negative and transitory aggregate shock. To accomplish this objective, I use an environment of incomplete markets and heterogeneous agents, following closely the frameworks developed by Aiyagari (1994) and Huggett (1993) and the spirit of Aguirre (2015). I found that, on average, agents will prefer an expenditure fiscal rule framework rather than a discretionary counter-cyclical fiscal policy. In the benchmark case, the government uses transfers to increase the consumption of agents during the aggregate shock. However, in the long run the opposite effect brought by the interest rate mechanism is stronger. Nevertheless, this effect is not the same for all agents: richer agents benefit from the increase in the interest rate while poorer agents will lose. With the fiscal rule, transfers decrease during the aggregate shock before coming back at their original level. As the interest
rate does not change, the only effect is the one brought by transfers. The total effect is then smaller than in the benchmark case.