Abstract
Abstract Historically Chile’s economy has been dominated by mineral products (mainly copper) as a source of exports and fiscal revenues. Copper prices and other commodity prices are often volatile. Since the 1980s the authorities have developed various mechanisms to cope with copper price shocks and dampen their effects on the business cycle. These mechanisms include a fiscal rule and a stabilization fund under a flexible exchange rate and an inflation-targeting regime. Apparently, this macro framework has been associated (causality is another matter) with reasonably good macro outcomes. However, this framework entails more discretion and less flexibility than often portrayed. (i) The mechanisms described include frequent revisions in the target fiscal surplus. (ii) Sovereign wealth funds, while defining rules for accumulating resources in good times, provide no rules for using them in bad times. (iii) They entail a possible bias towards over-accumulation of funds, with an ensuing opportunity cost.
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