Fiscal Institutions and Policies

In this chapter, Professor Larraín discusses fiscal policy and fiscal institutions, and there is a cyclical pattern of the fiscal deficit. Output fluctuations have important on the level of fiscal deficit, and fiscal deficits are cyclical, making it difficult to determine whether a deficit is die to government responsibility or just to economic situation. An indicator down as the structure of balance shows the fiscal balance that occurs when an economy us growing at its potential level. Structural fiscal rules allow for counter-cyclical fiscal policy. The middle income trap is the inability of countries to move beyond middle-income level, and there are some reasons why countries face tremendous obstacles in their development process, namely natural resource abundance, or the natural resource curse, and weak fiscal institutions, along with rent-seeking processes, and a lack of an independent autonomous fiscal advisory council. Examples are given to support this. Goes on to talk about sovereign funds and its role in bad times of the economy.

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