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Fiscal policy and economic growth: a simulation analysis for Bolivia
Analíti a
k
4
Revista de Análisis Estadístico
Journal of Statistical Analysis
4.2 Impact and dynamic transition effects
In the long run, we model changes in fiscal and non-
fiscal policies as permanent changes in the tax rates levied
on different sectors or as multiplicative shocks on their pro-
duction functions. In order to quantify the long run level
effects of these policies, we thus focus on comparisons be-
tween two steady states.
Three issues are overlooked in the long run analysis:
First, the nature of fiscal policy implies gradual rather than
instantaneous changes in macroeconomic variables. Sec-
ond, time timing of policy implementation must be consid-
ered when evaluating potential costs and benefits of pol-
icy changes because initial conditions are very different
from steady-state conditions. Finally, the structure of the
economy determines the speed of convergence to the new
steady state and the transitional dynamics.
Let
s
0
be the initial values of the state variables (cali-
brated to replicate the Bolivian economy in 2006). Let
G
i
(
·
)
be the policy functions of the control variables and
S
i
(
·
)
the implied laws of motion of the state variables for the
baseline scenario B and the comparisons scenarios C1 and
C2. Using the policy functions, the laws of motion and the
initial conditions, dynamic simulations are carried out for
every variable of interest. The dynamic simulations show
how long it takes to reach the percentage changes caused
by the combination of a 10-percent increase in government
expenditures and public investment as a share of govern-
ment revenues together with a 15.44-percent increase in the
effectiveness of public capital (last column of table 6). This
is our C1 scenario presented in the following table and in
figure B1 in the appendix.
Recall that we concluded in the previous section that
the best strategy the Bolivian government can adopt is to
increase government expenditures and public investment.
This is particularly true if the strategy is accompanied by
an increase in the effectiveness of public capital to compen-
sate for negative effects that higher current expenditures
have on transfers to households. The most notable varia-
tions were in relation to output, consumption and welfare,
each of which increase by more than 10 percent. These re-
sults are for the long run, however, and we don’t know
how long it would take to reach these long run steady-state
values.
The results in table 7 show that the macroeconomic
variables and sectoral outputs approach their steady state
values after 160 years. That is far too long and the results
can be even more disappointing if we consider that output
will only be 6.6-percenthigher than the baseline scenario
after 20 years, while welfare will only have improved by
4.5 percent over this period of time. After 5 years, Bolivia
will be growing at its historical level of about 4 percent.
These disappointing results lead us to analyze the C2
scenario where we added the productivity boost as per
the PND goals. This increase in overall TFP leads to
much higher steady-state values, and appropriate short
run growth rates as shown in the following table and in
figure B2 in the appendix.
22
Years
Variable
1
5
10
20
40
80
160
SS
Output
3.0% 3.8% 4.8% 6.6% 9.1% 11.3% 12.2% 12.3%
Consumption
0.7% 1.6%
2.7
4.7% 7.8% 10.6% 11.7% 11.8%
Priv. Investment
1.5% 4.2% 6.5% 9.0% 10.4% 10.5% 10.4% 10.4%
Pub. Investment
20.3% 20.4% 20.7% 21.6% 23.3% 25.0% 25.7% 25.7%
Welfare
0.8% 1.6% 2.6% 4.5% 7.1% 9.5% 10.4% 10.5%
Years
Sector
1
5
10
20
40
80
160
SS
Hydrocarbons
9.6% 11.9% 14.4% 18.5% 23.8% 28.5% 30.3% 30.5%
Agriculture
2.1% 2.6% 3.1% 3.8% 4.7% 5.4% 5.7% 5.7%
Mining
2.6% 3.2% 3.8% 4.8% 5.9% 6.8% 7.2% 7.2%
Importables
1.2% 1.4% 1.7% 2.6% 4.1% 5.7% 6.3% 6.4%
Non-tradables
2.7% 3.8% 5.1% 7.2% 10.0% 12.6% 13.6% 13.7%
Source: Author’s calculations
Table 7.
Dynamic transition - expansive fiscal policy
+
effectiveness of public capital.
22
By appropriate growth rates, we refer to the 2% GDP per capita growth required to reduce poverty levels.
Analítika,
Revista de análisis estadístico
, 2 (2012), Vol. 4(2): 57-79
71