Fiscal Rules and Discretion under Self-Enforcement / Marina Halac, Pierre Yared.

Format:

Book

Author/Creator:

Halac, Marina.

Contributor:

National Bureau of Economic Research.

Yared, Pierre.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23919.

NBER working paper series no. w23919

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we characterize rules that are self-enforcing: the government must prefer to comply with the rule rather than face the punishment that follows a breach, where any such punishment must also be self-enforcing. We show that the optimal rule is a maximally enforced deficit limit, which, if violated, leads to the worst punishment for the government. We provide a necessary and sufficient condition for the government to violate the deficit limit following sufficiently high shocks. Punishment takes the form of a maximally enforced surplus limit that incentivizes overspending; fiscal discipline is restored when the government respects it.

Notes:

Print version record

October 2017.