Comments on Chiles Structural Balance Rule as Social Policy by E. Engel, C. Neilson, and R.

Valds
Rmulo A. Chumacero

SBR as Social Policy

Putting the motivation in more provocative terms:

SBR as Social Policy

Putting the motivation in more provocative terms: Popularity can be bought

SBR as Social Policy

Putting the motivation in more provocative terms: Popularity can be bought The question is:

SBR as Social Policy

Putting the motivation in more provocative terms: Popularity can be bought The question is: Is it also optimal in the long run?

SBR as Social Policy

Putting the motivation in more provocative terms: Popularity can be bought The question is: Is it also optimal in the long run? This paper: Presents a simple model to derive optimal scal policy Compares it with other rules Invokes for more aggresive (countercyclical) scal policy

SBR as Social Policy

Putting the motivation in more provocative terms: Popularity can be bought The question is: Is it also optimal in the long run? This paper: Presents a simple model to derive optimal scal policy Compares it with other rules Invokes for more aggresive (countercyclical) scal policy My comments: Brief summary of the characteristics of the paper Provide a few technical suggestions Evaluate the results and implications

SBR as Social Policy

The Model
Government chooses the sequence of spending/saving (borrowing) Exogenous government income (natural resources) Access to risk-free rate asset (r) Is impatient ( > r) Borrowing constraint Is benevolent

SBR as Social Policy

The Model
Government chooses the sequence of spending/saving (borrowing) Exogenous government income (natural resources) Access to risk-free rate asset (r) Is impatient ( > r) Borrowing constraint Is benevolent Households Heterogeneous (but not really, si) No access to private capital markets (domestic or abroad) Exogenous private incomes (correlated to government income) Dependence on government for consumption smoothing

SBR as Social Policy

The Model
Government chooses the sequence of spending/saving (borrowing) Exogenous government income (natural resources) Access to risk-free rate asset (r) Is impatient ( > r) Borrowing constraint Is benevolent Households Heterogeneous (but not really, si) No access to private capital markets (domestic or abroad) Exogenous private incomes (correlated to government income) Dependence on government for consumption smoothing Government chooses how much to spend, given xed redistribute policy (i)

SBR as Social Policy

The Results
Solve for optimal spending policy function Discretize states Gt = g Ytp, Ytg , At
+ +

Welfare gains compared to mere redistribution are substantial Compare the gains to non-optimal rules Conclusion: policy ought to be more countercyclical

SBR as Social Policy

Some Questions/Suggestions
Discretization: AR with non-diagional cov?, VAR? Performed on logs
.25 .25 .20 .20

.15

.15

.10

.10

.05

.05

.00 -4 -3 -2 -1 0 1 2 3 4

.00 0 4 8 12 16 20 24 28 32 36 40 44

Figure 1: ln (Y ) Y is log-normal (extreme asymmetries)

SBR as Social Policy

Some Questions/Suggestions
Discretization: AR with non-diagional cov?, VAR? Performed on logs
.25 .25 .20 .20

.15

.15

.10

.10

.05

.05

.00 -4 -3 -2 -1 0 1 2 3 4

.00 0 4 8 12 16 20 24 28 32 36 40 44

Figure 1: ln (Y ) Y is log-normal (extreme asymmetries)

Welfare computations Welfare improvement ( ): Ergodic probabilities? Redistributing Y g creates meaningful heterogeneity Provides room for private markets (use this as benchmark)

SBR as Social Policy

Some Questions/Suggestions
Response to commodity boom: Conventionally: save more Here: Spend more RER

SBR as Social Policy

Some Questions/Suggestions
Response to commodity boom: Conventionally: save more Here: Spend more RER Impatience (Loosing oce) Aguiar et al (Expropriation Dynamics) Lower income and more volatility Role for balanced budgets constraints

SBR as Social Policy

Distortions
Income is earned, not distributed How would active agents react? Ratio between Taxes/Copper = 14.9 (1990-2009) Income eects of transferences on leisure choice The higher , the stronger eect

SBR as Social Policy

Reality Check 1: Heterogeneity

.7 .6 .5 .4 .3 .2 .1 .0

80

82

84

86

88

90 D01 D04 D07 D10

92

94

96 D02 D05 D08

98

00

02 D03 D06 D09

04

06

08

Figure 2: Standard deviation of ln (Y p )

SBR as Social Policy

Reality Check 2: Incentives

Unemployment Rates
.6 .70

Participation Rates

.5

.65

.4

.60

.3

.55

.2

.50

.1

.45

.0 1 2 3 4 5 6 7 8 9 10

.40 1 2 3 4 5 6 7 8 9 10

First Crisis

Second Crisis

Figure 3: Dierent Results

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions Social policy and who should smooth consumption

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions Social policy and who should smooth consumption Impatience, popularity, discretion

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions Social policy and who should smooth consumption Impatience, popularity, discretion .... as attested by the latest episode of departure from the rule

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions Social policy and who should smooth consumption Impatience, popularity, discretion .... as attested by the latest episode of departure from the rule Consider the distortionary eects of scal expenditure or social policies

SBR as Social Policy

Concluding Remarks
Very important issue Raises crucial questions Social policy and who should smooth consumption Impatience, popularity, discretion .... as attested by the latest episode of departure from the rule Consider the distortionary eects of scal expenditure or social policies Authors will surely make contributions in these matters