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  /  News   /  A conversation with Andrés Fernández, Director of Economic Research at the Central Bank of Chile

A conversation with Andrés Fernández, Director of Economic Research at the Central Bank of Chile

Andrés Fernández moderated the invited session Fiscal Policy in Trying Times invited by LACEA. The session featured presentations by Joshua Aizenman, professor of economics at the University of South Carolina; Guillermo Calvo, professor at Columbia University and director of the Economic Policy Management program at the same university; and Klaus Schmidt-Hebel, professor of economics at the Universidad del Desarrollo.

In the frame of LACEA-LAMES 2021, we spoke with Andrés Fernández, Director of Economic Studies at the Central Bank of Chile, and moderator of the invited session by LACEA. After completing his doctorate at Rutgers University, Fernández has been interested in public policy, which led him to the Inter-American Development Bank (IDB), more precisely to the Research Department of that entity. After seven years at the IDB, Fernández deepened his knowledge of public policy, especially fiscal and monetary policy. Working hand in hand with the central banks of the region opened the doors to the Central Bank of Chile, an institution in which he has worked for almost three years.

The research made by Fernández entitled Procyclical Fiscal Policy and Asset Market Incompleteness, holds that a greater degree of completeness of the markets corresponds to a more countercyclical fiscal policy. Thus, emerging markets, such as those in developing economies, tend towards a procyclical fiscal policy: periods of economic expansion correspond to higher spending and lower tax collection and those of contraction, with lower spending and higher collection. Meanwhile, the more advanced markets, typical of developed economies, tend towards countercyclical fiscal policies: periods of expansion correspond to lower spending and higher collection, and those of contraction, to higher spending and lower collection.

Fernández highlights that, intuitively, a countercyclical fiscal policy would be the most desirable. He explained that “You would like to have a countercyclical fiscal policy. For example, a fiscal policy where, if the economy is entering a contractionary phase, fiscal spending is something that mitigates that contraction because you start spending more or start lowering taxes. Unfortunately, this is not the case in emerging economies.”

Fernández also spoke about the fiscal rule, one of the tools that emerging economies use to start implemeting countercyclical fiscal policies: “If we are in a time of high growth, for example, because the price of oil is high, in Colombia, or the price of copper, in Chile, is high, let’s save that bonanza that we are experiencing, let’s spend less so that we have good savings in the periods in which things will surely reverse in the future.” Likewise, he stressed that the fiscal rule allowed Chile to cushion the negative shock of the 2008 economic crisis.

But the causal relationship between the completeness of the markets and fiscal policy must be apparent. It is greater completeness that causes a more countercyclical fiscal policy, not the other way around. “The causality, at least implicit in the model, is you tell me what the degree of completeness of markets is, and I will tell you how it will determine the degree of procyclicality or not of fiscal policy. Although not very easy to digest, one could think of stories where the causality was in the other direction, that is that increases in procyclicality worsen the completeness of markets even more”, explained Fernández. Their model can be usefull because it takes the completeness of the market as a given and stable variable in the economic cycle. Thus, it would allow predicting whether the economic policy will be procyclical or countercyclical in the economic cycle studied.