Public Expenditure Policy in Bolivia: Growth and Welfare

By: Carlos Gustavo Machicado, Paul Estrada and Ximena Flores

It has been widely documented that fiscal policy can promote economic growth, when it is based on an efficient provision of pubic capital. But little work has been done, in Bolivia, in relation to the macroeconomic and sectoral impacts of increasing public investment in infrastructure. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model for a small open economy with five sectors: Non-tradable or services, importable or manufacturing, hydrocarbons, mining and agriculture. The model is parameterized and solved for the Bolivian economy and several interesting scenarios are simulated by changing government expenditures, taxes, country risk, Total Factor Productivity, effectiveness of public capital and terms of trade. This analysis is relevant for the Bolivian economy, because the government is using fiscal policy as one of its main tool to attack poverty and aims to put public investment as the foremost instruments to promote growth and welfare.

We see many general equilibrium models that study industrialized economies, and this one is an exception. Looking at Bolivia, it studies the impact of various public investment strategies. Does it make sense to use such models for developing economies?

One Response to Public Expenditure Policy in Bolivia: Growth and Welfare

  1. M.H. says:

    Of course it is not a good idea. Representative models assume complete markets, and I sincerely doubt markets are complete in Bolivia.

    And how is this paper going to address poverty with a representative agent model? You need at least some sort of heterogeneity across households to talk about poverty.

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